The waste and environmental services sector continues to perform well depite the harsh economic climate confronting other industries.
Each year at this time, we at Grant Thornton take a step back and look at how the waste sector has developed over the previous 12 months and our 2012 report reveals some interesting findings about the changing landscape of the industry.
The waste and recycling market continued to develop in 2011 despite waste volumes being nearly 15% lower in 2010 than in the previous year. This drop was largely driven by legislation changes but also in part by the economic slowdown impacting volumes of commercial waste.
Recycling rates continued to increase in 2011 and the Welsh government confirmed it reached a 49% rate in the fourth quarter of the year, giving it the best rate in the UK. In 2000/01 Wales was recycling 7% - targets are now 75% for 2025 and zero waste by 2050.
Waste and environmental services sector indices have consistently outperformed FTSE 100 and All Share indices over the last three years
Progress is also now becoming evident in corporate activity. Our analysis found that landfill operators were under increasing pressure to add value to waste streams in order to generate returns and retain contracts. In addition, within some subsectors, advancing technology was diversifying the customer base.
There were a record number of merger and acquisition deals in the waste sector in 2011. The waste and environmental services sector indices have consistently outperformed FTSE 100 and All Share indices over the last three years. This was highlighted during the summer of 2011 when the FTSE 100 dropped sharply, reflecting the turmoil in the financial markets due to the Greek bailout and Eurozone crisis.
Examination of the deals shows an increasing level of investment by overseas parties combined with a particularly high number of acquisitions of both paper and WEEE recycling companies. An increasing level of acquisitions were made by overseas parties, while the most significant increase came in the paper recycling sector, with seven deals in 2011 compared with one in 2010.
The deals continue to be concentrated in the recycling, hazardous waste and waste management sectors, possibly as these are areas that tend to be made up of a large number of small businesses, providing opportunities for companies to grow by consolidation.
As with previous years, organic waste also continued to make up a significant number of M&A deals, with interest remaining in new waste treatment technologies, and in particular AD. Given this continuing interest in waste-to-energy technologies we would expect this trend to continue in 2012 and beyond.
The legislative landscape changed significantly as well last year.
The EU Waste Framework Directive was revised in 2011 and within this process there were calls for 50% of household waste to be recycled by 2020, 70% of construction and demolition waste to be recovered by 2020 and for a 35% reduction in biodegradable municipal waste to landfill by 2020.
The Waste (England and Wales) Regulations 2011 transposed the revised EU Waste Framework Directive into law and made changes to the way waste was managed in England and Wales. They came into force on 29 March 2011.
But elsewhere, the actions of the British government over the past 12 months has unsettled the waste funding market.
Historically, successive governments have encouraged new waste treatment technologies with support schemes including the Renewable Obligation scheme and more latterly Feed-in Tariffs (FIT) and the Renewable Heat Incentive. But the coalition government has brought such incentives under more regular review, which has generated nervousness amongst potential investors.
For example, the debate about the FIT regime has come at a time of global investment uncertainty with investor confidence in the waste sector waning. If we are to encourage investor participation in this market, we need consistency in the legislation and less frequent reviews by government.
- The Grant Thornton review, An ever changing landscape: waste and environmental services in the UK annual review 2011, will be released in the coming weeks.
Nigel Mattravers, head of waste at Grant Thornton UK LLP