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Where does the industry go for finance now that PFI is withdrawn?

Seven waste projects had their PFI credits withdrawn last autumn, so how is the waste industry supposed to get big waste projects off the ground? Katie Coyne reports

At a House of Commons debate at the end of last month, the private finance initiative (PFI) scheme came in for an almighty trashing. As the scheme is estimated to cost the taxpayer more than £200bn in public debt that will take decades to pay back, it is not surprising.

During the debate, MPs highlighted the fact that while a quarter of England’s 168 NHS hospital trusts have “significant” PFI hospitals within them, those trusts account for two-thirds of A&E closures or proposed closures.

Most of the criticism centred around using PFI for social facilities and not big economic infrastructure, such as waste. But the waste industry has been left waiting to see what will happen next because PFI was a major driver to building new facilities and attracting banks that were reluctant to invest otherwise.

To be fair, the Government has withdrawn PFI credits because it says the projects currently going through will be enough to meet EU landfill diversion targets - and not because it concurs with the criticism levied at PFI. But local authorities still have their own UK targets to meet, so there is still a lot more recycling to be done, especially around business waste.

Ian Goodfellow, managing director of Shanks Waste Management, said: “There is a significant amount of commercial and industrial (C&I) waste that needs treatment alternative to landfill. It’s my view that there is insufficient infrastructure for this, and there lies the dilemma.”

Normally, companies such as Shanks would build facilities using PFI-type contracts and then the facility would have additional capacity available to the C&I market. Many of those contracts are short term in nature, so banks are reluctant to fund schemes solely for this use.

“Without the central under-pinning by long-term municipal contracts that banks are prepared to lend against, there could be a problem,” added Goodfellow.

But at the moment there is nothing coming from the Government as to how waste infrastructure will be financed in the future. Equity firm the Foresight Group has gone on record to criticise the waste review for failing to answer this question.

The Green Investment Bank (GIB) could be a way to fill the gap between mainly bank funding and mainly PFI funding. “But we don’t know [enough] about the GIB,” said Nigel Mattravers, a director at accounting and consulting firm Grant Thornton. “We won’t have a brief for another few years. We don’t know what it can be used for. They [the Government] have said it can be used for waste projects.”

Much has been made of successful PFI schemes paying a rebate to the taxpayer. But Mattravers said this is “unlikely” in the case of waste projects because they are so long term, and the waste company also offers a waste service alongside the construction of facilities.

He argued that waste is very different to schools and hospitals in that the industry has “definitive targets” to meet, which is why PFI works and is fair in the waste sector. “What the politicians are saying is that in some of these deals, in their view, the developers were making excessive profits. But from another point of view, they were taking on all the risk,” he added.

Mark Berry, a partner at international legal practice Norton Rose, added: “PFI certainly showed that public infrastructure could be procured on time and on budget.”

He compared purchasing a large piece of waste infrastructure to buying a house. But in the case of waste PFIs, the price also included the purchase of a waste service too.

“Waste infrastructure projects cost many hundreds of millions of pounds,” he said, “and they need quite a bit of time to pay them back. But what the press forgets is that [the deal] is also buying a service for 25 years.”

Local authorities are now turning to merchant schemes for their waste treatment needs, but this can also lead to them being tied to long-term contracts without the benefit of owning a plant at the end of it. The fact that energy can be made from waste is also likely to change the way waste infrastructure is financed.

For now, the jury is out on how to do this and the industry is left playing a waiting game.

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