There are many ways of describing PFI’s, some good and some bad. It’s even more concerning that a new definition of PFI, “praying for infrastructure,” may become standard.
AS THE credit crunch reverberates through the economy, including the waste treatment and disposal sector, an additional barrier has arisen – that of access to funding. This is threatening the UK’s capability to hit EU Landfill Diversion Directive targets and to reduce its carbon footprint.
DEFRA estimated that the UK needs to develop some £12 bn of infrastructure to divert 25 percent of biodegradable waste away from landfill by 2010, 50 percent by 2013 and 65 percent by 2020, thereby hitting the statutory targets. The 2010 target of diverting 11.2m tonnes should be safe (10.6 mn tonnes were diverted in 2007-08) with the existing/planned infrastructure and enhanced recycling activities.
The 2013 target was looking feasible until the crunch, which has resulted in two key schemes being delayed as the successful bidders have been unable to finalise the necessary funding. In particular, the Greater Manchester Waste scheme – worth £4.4 bn in total – was originally due to close in April 2007, then April 2008 and most recently October 2008. Considering the time needed to get planning and build the requisite plants, the 2013 deadline could be missed, and the diversion target with it. The reasons for slowing down are deeper than money alone, and they have to do with the way the system is set up. This “institutionalises” slower decision-making.
There are three fundamental causes preventing the delivery of the infrastructure. Firstly, the PFI decision-making process itself presents local authorities with some of its most difficult decisions. Choosing the tender that is most economically advantageous while also taking into account the Authority’s “political” impact is a very difficult task, but it’s worth the effort.
The concept of PFI/PPP schemes is among the main challenges facing authorities and the majority will only ever come across a waste PFI scheme once and therefore must understand the nuances of the procurement process, the technology options and the sheer scale of the financial implications of their decisions all at once. This is no easy task for anyone! This isn’t helped by the system itself constantly evolving – SOPC3 morphing into SOPC4 and the emergence of competitive dialogue are two examples. Considering this, it’s no surprise that the need for professional advisors who have worked on multiple PFI/PPP contracts has been recognised, along with local officers, as a way to help ensure projects are completed on time.
Secondly, financial close does not guarantee the end of the headache. For many authorities, the problems continue as the thorny issue of planning looms.
Historically, it takes two to three years to go from OJEU to financial close, with planning taking an average of two years. In some cases it is significantly longer, with the potential to reach more than five years, as recently experienced by a UK waste plant. An energy from waste plant takes three years to build, and an MBT takes two years, so you’re looking at a minimum delivery time of six to seven years, plus an additional year for OBC and specification preparation.
Realisation is creeping in that project finance will probably not be more readily available until the second quarter of next year at the earliest in the sorts of amounts to enable projects to be closed (unless you have deep equity pockets or some very wealthy friends) (unless you have deep equity pockets or some very wealthy friends). But even then, the number of people applying for funding will be limited due to the high demand for deals that are currently trading on the stock market. Those who are not yet in the queue may experience delays in funding through fourth quarter 2009. With no time to catch up, the United Kingdom will miss its deadlines.
Now that the banks are going through “challenging times,” the government, local authorities, waste management contractors, EPC contractors, and technology companies are all “pray[ing] for infrastructure.