Pfi What Does It Really Mean?

There are many ways of describing PFI’s, some good and some bad. More troubling, a new definition of what PFI stands for, “praying for infrastructure”, just might stick.

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% of biodegradable waste away from landfill by 2010, 50% by 2013 and 65% 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 slow down are more deep-seated than funding alone and relate to the structure of the system which “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 most economically advantageous tender (“meat”), while considering the impact of any decision on the Authority from a “political perspective” is an exceptional challenge.

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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. No mean feat 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. Small wonder then, that there has been recognition of the need for professional advisors who, alongside local officers, can hopefully deliver the projects on time due to their experience in working on multiple PFI/PPP contracts.

Secondly, financial close does not guarantee the end of the headache. For many authorities, the problems continue as the thorny issue of planning looms.

History shows that to get from OJEU to financial close averages two to three years, with planning typically taking approximately 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. Coupled with a build time for an energy from waste plant of three years and an MBT of two, you are looking at a delivery time of six to seven years minimum from start to finish, plus another year for the OBC and specification preparation.

Experience is showing that a number of authorities are themselves trying to circumvent this problem by identifying sites in advance and getting bidders to pitch, in the absence of contractor-owned facilities in the region, for a site identified as part of their own local plans. Others are even considering submitting planning applications.

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The biggest and most current reason for delays is that there is no liquidity available for funding major infrastructure projects. It is not a lack of desire, nor a lack of confidence in the authority to provide the requisite waste or the contractor to design, build, operate and maintain the plant or even the thirst of the utility companies for renewable energy, there is just not enough money, whatever the terms. For the majority of schemes approaching financial close, a consortium of banks will most likely be needed. This too presents delays through additional due diligence, contract negotiations and internal credit committees.

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). Even then, there will be a bottle neck of applications for funds as those deals which are on the stocks now will be looking to be first in the queue. Those who are not yet in the queue may experience delays in funding through fourth quarter 2009. This delay is going to cause the UK to miss its targets with no scope for recovery.

So, now the banks are experiencing “challenging times”, the Government, local authorities, waste management contractors, EPC contractors and technology companies, are all “praying for infrastructure”.

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