At the end of November 2004, the Shanks Group signed a contract with Dumfries & Galloway Council for a 25-year PFI waste management scheme, writes Alex Black.

The £30m (US$57m) project – entitled the Dumfries & Galloway Integrated Waste Management PFI – will involve Shanks processing about 95,000 tonnes of municipal solid waste a year through the SPV Shanks Dumfries & Galloway.

The contract will include the construction of a mechanical biological treatment (MBT) plant on the outskirts of Dumfries and an Ecodeco facility that turns waste into fuel pellets.

After the deal was signed, Shanks chief executive Michael Averill described the Ecodeco system as ‘the most effective and deliverable waste treatment option for the 21st Century’.

This is the third PFI waste deal signed by Shanks to date and the company is showing that it is ‘committed to environmentally and technically sustainable waste management solutions’, according to Averill.

The rationale

Alistair Speedie group manager for strategic planning and transportation for Dumfries & Galloway council’s waste department says that of all the options explored for the scheme, PFI was seen as the best - and possibly only - way forward for the council to achieve its goal.

‘The council wanted to address its existing landfill assets and build facilities for the future that would address recycling and waste diversion and European landfill targets,’ said Speedie.

‘You have to solve the diversion issue if you are to reach these targets. Private sector expertise could help the council to move our waste strategy into the 21st Century. Shanks was chosen because it offered the most comprehensive system.’

The project

The scheme is a 25-year PPP project procured by Dumfries & Galloway Council with the aim of ‘achieving a significant and sustainable reduction in the amount of waste sent to landfill through an increase in waste recycling and the conversion of waste products into energy’.

The local authority decided that this would be best achieved by the construction and operation of a mechanical biological treatment (MBT) plant with capacity to treat 60,000 tonnes of waste a year through composting and mechanical separation technology.

Shanks will be responsible for around 95,000 tonnes per year of municipal solid waste, ensuring the council complies with both the European Landfill Directive and the UK legislation for bio-degradable municipal solid waste. New facilities will be built and the existing infrastructure developed securing existing employment and creating a number of new jobs in Dumfries & Galloway. The initial capital expenditure on the project will be around £30m (US$56m) over the next three years. The project will use the same fundamental MBT developed in conjunction with Ecodeco of Italy as in the East London Waste Authority contract. Many other councils are evaluating the potential of this technology for their own needs.

The main developments in the Dumfries & Galloway deal will include:

The construction of a MBT plant capable of processing around 60,000 tonnes per year The operation, completion and restoration of existing council landfill sites A new composting plant near Stranraer Shanks taking over and operating the council's existing transfer station and, subject to planning permission, providing a new transfer station Shanks taking over and operating 10 civic amenity sites

Planning and technology

One of the first hurdles the council had to overcome was the planning issue. Although Shanks proposed to use many existing facilities, there were still planning questions when it came to extending and reusing landfill sites – meaning the correct permissions had to be applied for before extra work could be undertaken.

The second problem was that the new technology being proposed – in this case, an Ecodeco plant and a Cambridge composting system – needed to satisfy certain criteria to gain PPPC permits and convince the council it was the right solution.

Although a significant part of the East London Waste Authority’s PFI scheme, the Ecodeco plant – a refuse-derived fuel plant converting waste into fuel – is the first in Scotland.

Speedie says: ‘By turning waste into fuel you divert waste away from landfill, but it is also the contractor’s risk to dispose of that fuel. However, as this fuel can then be used for energy production in any thermal plant, Shanks is confident of securing a contract to dispose of the fuel.’

The composting solution, known as the Cambridge system, takes waste, boils it down and turns it into a compound. The compost is then used in the restoration of landfill sites.

This is a fairly new system, but as Shanks has already used it in Argyle & Bute and was able to produce data from that scheme, Speddie’s team were satisfied it could work on the Dumfries & Galloway project.

The financing

The project was financed via a SPV, Shanks Dumfries & Galloway, which owns and operates all the facilities.

Around 85 per cent of the SPV will be funded by project finance debt which has recourse only to the contract cashflows. The balance will be provided from Shanks’ existing resources.

NIB Capital Bank provided the senior debt of £25m (US$47m) on a 20-year basis and an equity bridge facility of £3.9m (US$7.2m). The debt:equity ratio for the deal is 86.5:13.5.

Darren Kyte, executive dirtector at NIB Capital says the deal was solely arranged byNIB Capital, but Nord LB were asked to participate in the deal just before financial close.

‘The reasons for this was essentially to try an assist our client, Shanks, to broaden its funding capacity for this type of project, which is far less well understood than the mainstream sectors in PFI such as health or education,’ explains Kyte.

‘This is also important when looking at future transactions we are likely to be involved in arranging in the waste sector, and hence involves a natural requirement to manage our risk by developing a pool of banks that are able to participate in funding these deals.

‘Due to sporadic deal flow and the chequered history of the EfW market, there are very few banks that have a clear and demonstrable commitment to the sector.’

In essence, added Kyte, the Dumfries & Galloway scheme is largely a smaller replication of the East London Waste Authority project also being undertaken by Shanks and arranged by NIB Capital, so both parties had valuable experience of the sector and working with each other.

The legal issues

Energy, transport and infrastructure (ETI) partner Logan Mair led the Ashurst team who advised NIB Capital Bank and Nord LB, but he stresses that this was an important project for the sponsor Shanks because it gives it a thrid pathfinder PFI waste project after Argyle & Bute and the East London waste authority deals.

Although the Dumfies & Galloway deal has a low value in capital terms, it will provide an initial full year revenue of £6m (US$11m) and total revenues of £270m (US$502m) over its 25-year life.

‘This is common for this type of deal because the unitary charge is quite high,’ explains Mair. ‘Dumfies & Galloway isn’t a densely-populated area, but the project is of a decent sized and has been done to the satisfaction of both parties.’

In drawing up the contract, leagal advisors working on the deal had to cope with a number of obstacles. The contract documentation was required to accommodate a deal with complex multi-site arrangements, significant intellectual property rights in the composting and mechanical separation technology to be used and the inherent environmental factors involved in the project.

Firstly, there was the issue of geography. The scheme was spread over a large area and contained a number of different facilities. ‘Any multi-site project is more challenging,’ says Mair, ‘more so than say a hospital or school where you have a single site.’

Then there was the technology, although it presented a different set of problems for the lawyers than it did for Alistair Speedie in the council’s planning department.

‘The Ecodeco technology is successfully operational in Italy, so that doesn’t effect the deal too much,’ says Mair, ‘and this type of technology is relatively popular when compared to, say, incineration.

‘The problem you have instead is that you are dealing with bids that contain different technical solutions. This means bids for the same project involve different technology, which increases the number of variables.

‘Obviously this differs from a school or hospital project where the technical aspect is more or less the same and there aren’t many variations on the theme. Waste is similar to power in the way that different people will bid using different technical solutions.’

Lessons learned

One of the key lessons as far as Dumfries & Galloway council was concerned was the importance of strong project management.

‘Remember, not only do you have external advisors, but you have to replicate these with your own internal staff,’ says Alistair Speedie, ‘so you have to make sure that these other departments have that workload in their service plans so they can support you.

‘This is something we believe we delivered extremely well.’

The council also made sure its goals were set out at the earliest possible stage and made sure the tender was well advertised to guarantee a range of strong bids. In fact, the bids were strong enough to ensure a reserve bid that enabled the council to ‘to keep the pressure on during negotiations’.

Another area the council put a lot of work into was the HR aspect. Around 30 staff were moved over to Shanks, which provided esstential continuity and allowed a smooth transfer of the day-today workings.

Conclusion

It is now widely acknowledged that the waste sector needs a large amount of capital investment.

‘If you look at the various waste management companies you have to ask whether they have the balance sheet strength to finance these projects, or will they have to go down the project finance route,’ says Ashurst’s Logan Mair.

‘This is a growth sector, but because of the technology and multi-site aspects they are time consuming and complex.’

From a financier’s perspective though, the deal clearly demonstrates the strength of the PFI waste sector.

‘The D&G deal is to some extent an historical deal, as it was in the market for some considerable time,’ says Darren Kyte.

‘Further deal flow in this sector should of course help develop the banking market, as well as attract greater interest of potential new banks for whom other markets have dried up.’

It is fair to say that procurement of this project and the similar ones which will follow in other regions will be instrumental in helping local authorities meet the stringent waste management targets set by European and UK legislation.

According to Dumfries & Galloway’s Alistair Speedie, the scheme offers the council a chance to set a standard for waste disposal across the country.

‘This move away from landfill puts the council in a position that is way ahead of the game in terms of waste,’ he explains. ‘This will be a flagship waste programme not just for Scotland, but for the whole of the UK.’

Table

Project name	Dumfries & Galloway Integrated Waste Management PFI
Location	Dumfries & Galloway, Scotland
Project description	A 25-year concession for the provision of integrated waste management facilities in Dumfries & Galloway
Date of Financial Close:	26 November 2004
Project sponsor	Shanks PFI Investments Limited
Operator	Shanks Waste Management
Public sector partner	Dumfries & Galloway Council
Total project value	£270m
Total debt	£25m
Total equity	£3.9m
Lead arranger	NIB Capital Bank
Co-arranger	Nord LB
Debt:equity ratio	86.5:13.5
Senior debt repayment date	30 September 2025
EPC contractor	Sistema Ecodeco
Financial advisor to the project company	Quayle Munro
Financial advisor to the Government	Caledonian Economics
Legal advisor to the project company	Burness
Legal advisor to the Government	McGrigors
Legal advisor to the lenders	Ashurst
Technical advisor to the council	Jacobs Babtie
Technical advisor to the lender	Fichtner