From the ground up

11 July 2011

The English waste market has been going through something of a re-organisation following the removal of a significant number of PFI credits in late 2010 and the contraction of the lending market. While industry heavyweights have for a long while demonstrated that they have the corporate clout to borrow against their balance sheets, other smaller operators are finding it difficult to secure traditional senior debt on acceptable terms in today’s risk-averse lending environment.

The ability to demonstrate the long-term potential of a scheme and reassure investors is therefore paramount. This is where the legal advisors within a project team can add particular value, helping to ensure contract structures are transparent and effective and that the relevant terms and safeguards are in place for the borrower too.

The national regulatory framework has to date provided a persuasive justification for investment in municipal waste infrastructure. However, in June the government proposed the removal of what has undoubtedly been one of the cornerstones of financial viability of many municipal waste treatment facilities by committing to the abolition of the Landfill Allowance Trading Scheme (LATS). Announced as part of the wider Waste Policy Review, it was acknowledged that while LATS has been an effective tool in driving biodegradable municipal waste away from landfill, as required under the EU Landfill Directive, landfill tax had become in recent years ‘by far the more significant driver’. The current LATS framework is therefore due to be scrapped from the end of the 2012/13 compliance year.

Without this statutory justification for assessing future demand against up-front investment, the financial viability of proposed municipal schemes are likely to be questioned – and it is unlikely that we will see the Coalition introduce an alternative statutory measure. Therefore we may well see Waste Disposal Authorities (WDAs) stepping back from entering into 20 to 30 year commitments and looking for shorter-term service contracts through existing or pipeline merchant facilities. WDAs may lose the benefit of a ‘reverting asset structure’ which sees them take ownership of a facility at the end of contract, but would get the benefit of the flexibility of shorter service contracts, with the private sector operator taking on the bulk of the risk on development and operation of the facility. However, shorter term contracts can themselves cause funding difficulties for merchant facility operators unless there is a cornerstone long-term contract for a significant proportion of the facility's capacity.

There are likely to be substantial regional variations in the measure of how viable new waste infrastructure will be too. For example, the South East and South West of England have much lower landfill capacity than certain other regions so the lack of available or affordable void space will be more of a significant driver in planning a new waste facility against the alternative of increased waste haulage. However, yet again policy decisions have a considerable impact here – with a greater emphasis being placed on UK-wide recycling targets in recent years.

A further blow could come next month when the European Union votes on whether only compost and digestate produced under the PAS 100 and PAS 110 quality protocols will be recognised as ‘recycling’ under the revised Waste Framework Directive. The result of the vote on 1st July could have major ramifications for established and proposed waste treatment facilities and the contract terms under which waste is supplied to them, as well as the ability for developers to demonstrate the financial viability and regulatory justification of new schemes.

Burges Salmon continues to work closely with developers, local authorities and operators of all sizes on financing and contracting structures to unlock funding required to develop new waste and renewable energy infrastructure and secure the necessary feedstocks, as well as identify innovative ways to sell the energy they generate.

For more information please contact senior associate Nick Churchward, nick.churchward@burges-salmon.com.

This article was originally published in Materials Recycling Week on 8 July 2011.