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A greater power

Winning the Greater Manchester recycling and waste PFI deal was a major step forward for resource and waste management firm Viridor. MRW editor Paul Sanderson met Viridor chief executive Colin Drummond to findout why.

More from: A greater power

What people don’t realise is that waste is already the major source of renewable energy in the UK,” says Viridor chief executive and Pennon Group (owner of Viridor and South West Water) executive director Colin Drummond.

“It is already 30% of total UK renewables or 1.5% oftotal UK electricity. On my numbers waste could in the future account for 6% of total UK electricity. Others such as the ICE and the Institution of Mechanical Engineers believe the figure could be still higher. Waste has got huge potential as a source of renewable energy.”

When Viridor Laing was made preferred bidder of the Greater Manchester Waste Disposal Authority (GMWDA) PFI contract in January 2007, achievement ofhigh recycling levels and energy creation was at the heart of its proposal. Estimated to be worth £3.8bn over the 25-year life of the contract, the deal was won by a consortium featuring resource and waste management company Viridor and infrastructure investor John Laing.

Viridor Laing will be responsible for handling approximately1.3M.t of waste collected in Greater Manchester. The total project and its ancillary facilities will generate 130MW of power.

For Viridor, this was a hugely important contract to win according to Drummond. “It is the UK’s and probably Western Europe’s biggest ever waste and renewable energy contract.

“It is the UK’s and probably Western Europe’s biggest ever waste and renewable energy contract.”

Colin Drummond, Viridor

“The total capital investment involved is around £640M before capitalised interest. To put that in context, Viridor probably has a market value, according to stock market analysts, of about £1.2bn. So another £640M of capital investment is a very significant addition - albeit via special purpose vehicles.

“It is a major step forward for Viridor. It is well known that we have achieved over 20% per annum profit growth since 2000. Something like Greater Manchester helps us to continue to provide continuing profit growth to shareholders.”

The day-to-day activity is already up and running with Viridor Laing signing the contract on 8 April this year and immediately taking over the existing facilities and operations belonging to GMWDA. The next step is to build or renovate the range of facilities that were promised in the contract.

These facilities are:

  • A thermal power station in Runcorn, Cheshire for solid recovered fuel created from residual waste that cannot be recycled. This will be used to provide energy in the form of electricity and heat for the Ineos Chlor chemicals plant nearby
  • Five mechanical biological treatment with four associated anaerobic digestion facilities that will sort materials into dry recyclables and solid recoveredfuel for use in creating renewable energy as well as using the methane from the AD process to create electricity
  • A materials recycling facility to sort kerbside collected materials
  • Twenty four household waste recycling centres will either be overhauled or new sites constructed
  • Seven transfer loading stations will receive recyclable and non-recyclable waste from collections to be sent for reprocessing
  • Two green shredding facilities will shred green waste in preparation to be sent to a composting facility
  • Four in-vessel composting facilities will treat garden and kitchen waste.

In addition, there will be an ongoing contract for disposal by landfill sent by rail and road. But the aim of the PFI is to divert 75% of total waste from landfill with at least 50% of waste being recycled or composted.

“We’ve got planning permission already for all the 27 sites and 43 facilities required plus the thermal power station at Runcorn,” says Drummond. “We were building some of the facilities even before financial close. Several facilities are now complete. Everything is moving forward very quickly.”

When Viridor Laing was chosen as preferred bidder in early 2007, the world’s economy and debt markets were still strong. But during the subsequent negotiations with the banks, the credit crunch and subsequent recession struck

“It was quite a challenge [to reach financial close] on the UK’s biggest ever waste and energy project in the midst of the banking crisis that hit us. In all, from preferred bidder to financial close it happened quite quickly - a little over two years. This is in fact less than some of the smaller contracts have taken.

“Then the financial crisis hit us and that meant that syndication of bank loans was very, very difficult.”

Colin Drummond, Viridor

“The original plan was that there would be one or two lead banks which would syndicate the funding. That was the situation in April/May 2008. Then the financial crisis hit us and that meant that syndication of bank loans was very, very difficult.

“We weren’t immune to what happened with the world banking situation. Banks were becoming more nationalistic and overseas banks were less happy putting money into the UK. They were under pressure to put money into their own economies rather than the UK. You can imagine the situation.

“The structure of the deal was therefore changed in the sense that instead of being one or two lead banks syndicating the loans, we moved to a club of four banks all putting the money in separately. This of course added to the complexity of the matter because each of those four banks had their own requirements in terms of what had to go into the deal instead of having one or two lead banks that agree the deal and then sub it out.

“Then there were various other things that had to be brought to play to get the deal done. European Investment Bank (EIB) funding was important.EIB is very keen on supporting renewable energy projects and has allocated £4bn to renewable energy projects in the UK - so this project fitted well. Ultimately it was a question of everyone working together very hard to get the deal done in very critical financial circumstances.”

Eventually the money was raised with Bank of Ireland, BBVA, SMBC and Lloyds TSBputting in a total of £245M. The EIB added another £185M, while Greater Manchester and Pennon Group increased it’s financial commitment to the project. Finally, £120M was loaned via the first use of the Treasury Infrastructure Finance Unit that was devised to aid PFI projects struggling to raise private finance.

Asked if Drummond thinks the difficulties in financing Greater Manchester has set a benchmark for future waste PFI deals, he responded: “Yes, but quite an unusual benchmark.”

“We may find that banks are less happy than they were previously in giving 25-year non-recourse bank debt into PFI contracts.”

Colin Drummond, Viridor

“A contract of this size and complexity would be a challenge even in the best of times. For a contract of the size of Greater Manchester and a council that is focused and efficient, it made sense to put in the great effort in coming up with a tough and clear 25-year PFI contract.

“My guess is that in future, we are going to see in many cases different contractual forms. First of all, rather than trying to do all embracing contracts that involve every aspect of the solution, they’ll be split up into more bite-sized pieces. This is what happened with Viridor’s contract with the South London Waste Partnership contract last year where there is a PPP for landfill disposal and a separate PPP for recycling etcetera. So one thing I think we’ll see is splitting up of the contracts into smaller pieces.

“But I also think we’ll see an increased role for corporate financed projects, which of course is something that Pennon/Viridor, given the size of our balance sheet, are able to do. We may find that banks are less happy than they were previously in giving 25-year non-recourse bank debt into PFI contracts.”

The next challenge is to keep winning these PFI contracts, even if they are smaller. Recently Viridor was appointed preferred bidder for another PFI contract in Oxfordshire and is shortlisted for one in Cheshire. Energy and making the most of resources will continue to be at the centre of Viridor’s approach.

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