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Municipal

The Municipal Division operates waste treatment facilities for UK and Canadian city and county councils under long-term contracts, typically 25 years. Such contracts are established primarily to divert waste from landfill in a cost-effective and sustainable way.

In the UK, the capital cost of the associated infrastructure is financed with non-recourse bank debt and in the case of PFI, is supported by central government funding. Both PFI and PPP contracts benefit from guaranteed revenues and tonnages from the associated council. The business model is shown below.

In a typical PFI or PPP solution, a special purpose vehicle (SPV) is created to finance the construction of the treatment assets and Renewi arranges for a club of banks to provide funding. Securing this funding is called ‘Financial Close’, at which point all the long-term contracts are signed between Renewi, the councils, the suppliers and the banks. This signals the start of the build phase, in which Renewi may or may not be the main contractor. On completion and commissioning of the assets, Renewi will generally inject up to 20% of the invested capital of the SPV in the form of subordinated debt, which should earn a return of around 12% pre-tax.

Once operational, there are two potential income streams from the PFI or PPP contract. The first is the income for treatment of the waste under the operating contract, which is signed with the Municipal Division as the supplier. The operating contract offers the Group protection from waste volumes and similar items that have caused challenges within our Commercial Waste Division. However, the terms of our older contracts do not provide a fixed cost to the disposal of processed off-take produced and this has resulted in severe margin pressure.

The second cash stream is the interest from the subordinated debt and ultimately a dividend stream from the SPV. The Municipal Division has historically sold the majority of its interest in its SPVs, following commissioning, to a third party; so this is currently a minor part of our income. However, we maintain an open stance on our ownership of current and future SPV stakes.

In Canada, the facilities are generally funded from our own balance sheet, supported by long-term contracts. On occasion, the customer may provide some funding support.

Markets

The bidding process for major PFI/PPP opportunities in the UK is largely complete, with only our Derby project still under construction. Some councils are still seeking a solution to their waste diversion needs, quite possibly through contracting spare capacity in existing assets. The Canadian market is still in a growth phase, with many municipalities yet to invest in the infrastructure required to divert waste, especially organic waste, from landfill. Renewi has a good overview of the pipeline of potential opportunities in Canada and into parts of the US but is not currently actively bidding on new contracts.

The Municipal Division, having secured its input waste under long-term contract, then competes in a number of downstream markets, in particular with regard to the provision of solid recovered fuels (SRF) to cement manufacturers and refuse derived fuels (RDF) to energy from waste companies. A proportion of these disposal routes are secured under long-term agreements. However, the older contracts have generally not fully secured their disposal and the current market has become very challenging. The demand for SRF derived from municipal waste has declined sharply, while the cost of disposing of RDF has increased very significantly from a low of around €40 per tonne to a current market price of around €80 per tonne, with additional costs of around £11 per tonne to provide baled rather than loose product. The decline of Sterling against the Euro from around €1.45 to €1.17 has also further significantly increased the cost of disposal for the Municipal Division, although this is more than offset by the increased value in Sterling of the Group’s overwhelmingly Euro-denominated profits.

The Municipal Division also operates two commercial Anaerobic Digestion (AD) facilities – one accounted for as a joint venture. The Westcott Park facility in Oxfordshire, which is wholly owned, has experienced severe difficulties in securing organic waste streams with an over-capacity of AD facilities in the area. On the other hand, the Zero Waste Scotland initiative has resulted in a sharp increase in the supply of source segregated organic waste in the Edinburgh/Glasgow area resulting in more robust pricing for our EBG joint venture.

Technologies and Products