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Why are merchant waste facilities so hard to fund?

Millions of tonnes of commercial and industrial (C&I) non-recyclable waste are going to landfill each year. Yet landfill is in rapid decline - the number of active sites has fallen by more than 75% during the past eight years.

This represents a huge business opportunity to deliver merchant waste infrastructure. But industry insiders are asking why more merchant plants are not being built - especially with landfill tax due to rocket to £80 per tonne in April 2014.

Financing these projects is the key issue. A study last year by Tolvik Consulting found that finance was a greater barrier to the building of residual waste facilities, including C&I waste, than planning. The study found that, in 2010-11, fewer than half of residual waste treatment facilities that had been given the planning green light had made it to the construction stage.

Former Tolvik director Adrian Judge, now executive director at the Green Investment Bank, told MRW that plants, such as those using gasification, were getting planning permission relatively quickly and easily, but the gap between consent and construction “suggests the next issue is one of raising the finance and getting the plants built”.

A survey of 60 senior executives in the industry in the latest Norton Rose report on the future of the industry confirmed this: 36% said that securing finance was a major challenge for merchant waste schemes compared with 24% who cited planning.

The director of one anaerobic digestion (AD) plant that has recently secured £21m to build such a facility in Dagenham, Michael Fishwick chief executive of TEG Group, said: “It took us three years to get this funded and it was extremely challenging.”

So why are merchant plants finding it so hard to attract investment? Lack of certainty seems to be one of the major worries for investors and developers. The heydays of Landfill Allowance Trading Scheme targets and the Private Finance (PFI) programme are gone.

Case study 1: the developer

It took us three years to get our Dagenham plant funded and it was extremely challenging. The reason funding is difficult is because the financial markets are difficult. We did struggle to get contracts together.

Councils are not going to set up collection programmes if there is not a local disposal point. But you do not want to build the plant if there are no collection programmes, so it’s a bit chicken and egg. In the end we had to take a bit of a risk. But the Greater London Authority took risks as well - it supported the scheme and, in the end, that was one of the reasons it happened.

What we need is more funding from the private sector and more waste; local authorities and the private sector need to commit to contracts. Give us more money and more waste and we can build more AD plants.

Michael Fishwick, chief executive, TEG Group

Paul Levett, an industry non-executive director, said : “These long-term PFI contracts, often 25 years, were attractive to banks - certainly prior to the 2007/08 credit crunch.”

In the Norton Rose survey, 34% of respondents said that securing feedstock was a major challenge - almost the same proportion as were worried about finance. The two can be closely linked.

Adam Read, waste management practice director for Ricardo-AEA, told MRW: “Most merchant developments are hijacked by uncertainty in feedstock inputs.”

Policy also has repercus-sions in this area. For example, for proposed AD plants, policy can provide assurances about future levels of feedstock. In Scotland, the segregation of organic waste has been mandated and macerators have been outlawed, and in Wales, there is some commercial waste source segregation at source.

Read said this gives “clarity about whether there will be feedstock on-stream within the next year to 18 months, which gives technology planners the green light to invest”.

Some in the industry think that radical policy action is needed to get investment to merchant plants flowing.

Mike Brown, director of Eumonia, suggested in a recent blog: “What the patient really needs is a dramatic intervention on a completely different level. For example, the Government could give waste disposal authorities (WDAs) the power to direct where C&I waste arisings are sent. WDAs could then plan how best to manage waste in their area.

“Obtaining WDA approval would act as a gateway for funding, giving investors confidence and gradually improving C&I residual waste treatment.”

But Brown admits his proposal is improbable in the short-term.

Something that developers can do themselves to mitigate the issue of uncertainty is to focus on investing up-front in creating a top-notch business case for their proposition.

Nigel Mattravers, senior waste advisor for Golder Associates, said: “It can be difficult to raise funds, but this is often down to the quality of the business case being brought to the market rather than a lack of interest from investment groups.”

There are also a couple of schemes in hand that could raise investors’ confidence in merchant plants. One initiative to be launched is a Ricardo-AEA and WRAP partnership to improve investor-tech company relations in the energy recovery sector, and will include investor briefings on the market.

A report on the European Pathway to Zero Waste programme, which explores how the development of waste infrastructure can be de-risked through partnership working, is also due soon and could bear some useful lessons.

The road ahead to gaining investor confidence and getting more merchant plants built will certainly be bumpy. But in the next couple of years, investors should become more familiar with the barriers and opportunities of merchant waste management facilities and developers and technology planners will be better able to put across their business cases following those that have set technological and financial precedents.

The icing on the cake would be policies that can guarantee feedstocks, such as the Dagenham example above. Or will it take something yet more radical?

Case study 2: the investor

Iona Capital has invested in Gradena, a company specialising in the use of recycled rubber from waste tyres. Waste tyres remain a significant environmental issue as the Landfill Directive now prohibits sending whole and shredded tyres to landfill. Gradena will manufacture homogeneous wood replacement goods from waste tyres and recycled U-PVC using its patented nano-surface intensification process.  

The technology is already operational in a full-scale plant in Thailand, which provided the investors with sufficient technological validation to set up a similar UK operation.  

Iona Capital ensured that there was a secure long-term offtake agreement for the wood substitute product, currently sold to the Middle East. But the management is looking to secure sales contracts in the UK. Iona was provided with detailed market surveys showing alternative outputs for the nano-timber. Gradena’s management is experienced in the sector.

Mike Dunn, director, Iona Capital

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