Towards a standard approach to waste PFI contracts
Standardisation of contracts in the PFI waste market remains frustratingly elusive. But, says Ralph Wilkinson, progress is undoubtedly being made.
The UK PFI waste market is still relatively young and diverse. As a result, the contracts governing these projects have not to date been standardised. Different solutions and technologies used in different projects as well as the localised nature of the deals had made it difficult to produce a standard contract template. The progress towards standardisation in the PFI waste market has been coloured by the relative success of these rival technologies, the wishes of our councils, the force of public opinion and above all the EU Landfill Directive.
Despite these difficulties, the EU Landfill Directive has stipulated strict targets: to reduce biodegradable municipal waste to 75% of that produced in 1995 by 2010; to reduce biodegradable municipal waste to 50% of that produced in 1995 by 2013; and to reduce biodegradable municipal waste to 35% of that produced in 1995 by 2020. In a survey of market stakeholders, carried out by Norton Rose in 2009, just 55.5% of respondents considered the 2010 targets attainable. Respondents were even less positive about meeting the 2013 and 2020 targets.
To give the UK a fighting chance of meeting these targets, it is clear that waste schemes will have to be procured more frequently and in less time than they are currently. Standardised waste PFI contracts will help speed the procurement process. It is important, therefore, that the UK market creates and works from standardised contracts as soon as it can.
The governmental body (Waste Infrastructure Delivery Programme or WIDP), which is working to produce a standard Residual Waste Treatment Contract (WIDP Contract), released a draft contract for consultation in June 2009. They have recently released guidance to their initial findings and are expected to publish a final version of the WIDP Contract in the first quarter of 2010. The infrastructure team at Norton Rose has welcomed this as a move in the right direction and we would expect the WIDP documentation to help progress standardisation on forthcoming projects.
At the same time as the WIDP consultation, Norton Rose carried out a survey of waste industry stakeholders, The future of waste PFI: Three years on, which was published in September 2009. Amongst other issues raised by the survey, concerns about the standardisation process were highlighted. Norton Rose had also conducted a similar survey in 2006 and this provides a useful context in which to understand the results from the 2009 survey.
In 2006 just 25.4% of the market claimed standardisation had been successful, with 22% labelling it as “quite successful” and 3.4% as “very successful”. At the time of the initial survey it had been expected that a standard contract would be in place within a couple of years. This timescale proved over-optimistic. The recent progress by WIDP nevertheless suggests this may now not be far away, although the consultation comments show there are still real issues about what Government would like to achieve and what the market will accept.
The reason for the delay is, as many acknowledge, that the waste PFI sector is a lot more complicated than comparable markets, such as schools and hospitals. According to one industry interviewee around 70% of all clauses in the contracts have to be changed in order to cover all differences. However, over the last three years the standardisation of waste PFI has gained support as more waste projects have reached financial close and as market positions have been established. This success has been down in no small part to the private sector, with sponsors and banks speeding up and establishing a framework for waste projects. Perhaps sensibly, the waste market had to go through this period of learning before a standard form of waste contract could be established.
According to the 2009 poll, the bulk of those questioned (70.9%) supported the standardisation process. In total 60.4% of those questioned said that the standardisation exercise has been quite successful and a further 10.5% claimed it was “very successful”. As such, the outlook for standardisation continues to improve.
While smaller projects may benefit from standardised contracts, larger schemes will probably require something more bespoke. The need for greater flexibility to accommodate the additional facets of waste PFI, including issues such as energy from waste, is one theme that continues to be suggested.
Indeed, the difficulties of standardisation stem in large part from the unpredictability and variation in the technology used by the market. In the 2009 survey, many of the respondents’ issues focused on the use of technology. Whereas in 2006 14% cited it as a problem, nearly a fifth see it as a barrier to waste PFI projects today. In today’s market, we are seeing a different number of technologies being used with varying degrees of success. We expect this issue to resolve itself as certain technologies become tried, tested and then adopted by the market.
The technological uncertainty has meant the outlook and evolution of the waste market is cloudy. One respondent to the 2009 survey even claimed the technology was still in the “Lego phase” and problems could reveal themselves in the future. The projects that have been successful, however, tend to prefer the simplest technology, and the consensus appears to be that a combination of different technologies, rather than a “one size fits all” solution, is the preferred route.
On the eve of the first standard WIDP Contract and despite the difficulties presented by the considerable variant factors in the market, industry stakeholders recognise the need for standardisation and have the will to make it work.
Ralph Wilkinson is a member of the London banking team at Norton Rose.
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Standardisation of contracts in the PFI waste market remains frustratingly elusive. But, says Ralph Wilkinson, progress is undoubtedly being made.
The UK PFI waste market is still relatively young and diverse. As a result, the contracts governing these projects have not to date been standardised. Different solutions and technologies used in different projects as well as the localised nature of the deals had made it difficult to produce a standard contract template. The progress towards standardisation in the PFI waste market has been coloured by the relative success of these rival technologies, the wishes of our councils, the force of public opinion and above all the EU Landfill Directive.
Despite these difficulties, the EU Landfill Directive has stipulated strict targets: to reduce biodegradable municipal waste to 75% of that produced in 1995 by 2010; to reduce biodegradable municipal waste to 50% of that produced in 1995 by 2013; and to reduce biodegradable municipal waste to 35% of that produced in 1995 by 2020. In a survey of market stakeholders, carried out by Norton Rose in 2009, just 55.5% of respondents considered the 2010 targets attainable. Respondents were even less positive about meeting the 2013 and 2020 targets.
To give the UK a fighting chance of meeting these targets, it is clear that waste schemes will have to be procured more frequently and in less time than they are currently. Standardised waste PFI contracts will help speed the procurement process. It is important, therefore, that the UK market creates and works from standardised contracts as soon as it can.
The governmental body (Waste Infrastructure Delivery Programme or WIDP), which is working to produce a standard Residual Waste Treatment Contract (WIDP Contract), released a draft contract for consultation in June 2009. They have recently released guidance to their initial findings and are expected to publish a final version of the WIDP Contract in the first quarter of 2010. The infrastructure team at Norton Rose has welcomed this as a move in the right direction and we would expect the WIDP documentation to help progress standardisation on forthcoming projects.
At the same time as the WIDP consultation, Norton Rose carried out a survey of waste industry stakeholders, The future of waste PFI: Three years on, which was published in September 2009. Amongst other issues raised by the survey, concerns about the standardisation process were highlighted. Norton Rose had also conducted a similar survey in 2006 and this provides a useful context in which to understand the results from the 2009 survey.
In 2006 just 25.4% of the market claimed standardisation had been successful, with 22% labelling it as “quite successful” and 3.4% as “very successful”. At the time of the initial survey it had been expected that a standard contract would be in place within a couple of years. This timescale proved over-optimistic. The recent progress by WIDP nevertheless suggests this may now not be far away, although the consultation comments show there are still real issues about what Government would like to achieve and what the market will accept.
The reason for the delay is, as many acknowledge, that the waste PFI sector is a lot more complicated than comparable markets, such as schools and hospitals. According to one industry interviewee around 70% of all clauses in the contracts have to be changed in order to cover all differences. However, over the last three years the standardisation of waste PFI has gained support as more waste projects have reached financial close and as market positions have been established. This success has been down in no small part to the private sector, with sponsors and banks speeding up and establishing a framework for waste projects. Perhaps sensibly, the waste market had to go through this period of learning before a standard form of waste contract could be established.
According to the 2009 poll, the bulk of those questioned (70.9%) supported the standardisation process. In total 60.4% of those questioned said that the standardisation exercise has been quite successful and a further 10.5% claimed it was “very successful”. As such, the outlook for standardisation continues to improve.
While smaller projects may benefit from standardised contracts, larger schemes will probably require something more bespoke. The need for greater flexibility to accommodate the additional facets of waste PFI, including issues such as energy from waste, is one theme that continues to be suggested.
Indeed, the difficulties of standardisation stem in large part from the unpredictability and variation in the technology used by the market. In the 2009 survey, many of the respondents’ issues focused on the use of technology. Whereas in 2006 14% cited it as a problem, nearly a fifth see it as a barrier to waste PFI projects today. In today’s market, we are seeing a different number of technologies being used with varying degrees of success. We expect this issue to resolve itself as certain technologies become tried, tested and then adopted by the market.
The technological uncertainty has meant the outlook and evolution of the waste market is cloudy. One respondent to the 2009 survey even claimed the technology was still in the “Lego phase” and problems could reveal themselves in the future. The projects that have been successful, however, tend to prefer the simplest technology, and the consensus appears to be that a combination of different technologies, rather than a “one size fits all” solution, is the preferred route.
On the eve of the first standard WIDP Contract and despite the difficulties presented by the considerable variant factors in the market, industry stakeholders recognise the need for standardisation and have the will to make it work.
Ralph Wilkinson is a member of the London banking team at Norton Rose.
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