LWARB’s knowledgeable and experienced team has identified projects, has built a strong rapport with potential financiers and is working closely with sponsors developing projects in order to get them to the finishing line but infrastructure is not something that appears over night. This not only relates to build time and planning, but also to the time it takes to align the funders and ultimately reach financial close.
Meeting the milestones required of a project prior to signing financing documents are often outside LWARB’s control and whilst we look to cajole the various elements of the project to enable close, sometimes it just cannot happen any faster. Two key issues are:
- Investor appetite in the sector
- Certainty of government incentives
LWARB invests alongside other investors. Currently, securing the commitments of these investors is a stumbling block. The state of the wider finance market and the appetite of other debt and equity providers in the waste sector has a significant impact on our ability to invest. Traditional project finance is generally only available for large deals with proven technologies, long term feedstock and offtake contracts, and where the borrower has a strong covenant strength.
While there are a number of equity funds prepared to invest in the sector, the number with sufficient expertise in the waste market and sufficient risk appetite to consider new technologies or merchant plants to treat C&I waste remain relatively few, particularly given the lack of opportunity to realise leveraged returns and reduce exposure through bringing debt into projects. LWARB does not have a huge pot of funds and cannot / does not want to fund projects alone, wanting to leverage our funds so that we can deliver more projects. Investing alongside the private sector also demonstrates the commercial viability of the project.
Working closely with equity investors (including the Foresight Environmental Fund in which LWARB has invested £18 million) has helped to progress projects. However, it does take time to attain milestones required for the release of funds such as further technology due diligence.
The certainty of the legislative position in relation to Government incentives (such as under the Renewables Obligation) is another issue that is affecting investor appetite and delaying close on projects. Unfortunately, a number of our projects are awaiting a decision on the levels of support they will receive through incentive schemes. In the meantime, we have to wait patiently until the results are published because up until that point the economic case is not clear.
Additionally, LWARB’s funds need to be disbursed sensibly. We are dealing with public funds and they cannot and should not be flippantly spent. The right projects will meet LWARB’s target requirements in relation to CO2 diversion and tonnages treated as well as our commercial requirements. We won’t have done our job properly if we invest in projects that are not sustainable in the long term. We should not have to grant projects money or provide soft loans when they are proposed by commercial entities to deliver a profit making infrastructure project.
The rationale for LWARB filling a financing gap will not be because it is a bad or uneconomic project. The rationale for investment varies, it could be merchant in its nature, have an innovative technology, or is just too small for the banks to be interested. As such, although LWARB is willing to take some of the risks that a typical bank may not, commercial returns are attainable.
For us to deliver as much as possible for London, we require returns on our investments so that we can continue to invest over time. A sustainable project with a good commercial rationale will be a project that will help London to deliver for years to come. This is what we want to achieve.
Charlotte Eddington, head of infrastructure and investment, LWARB