Prudential Funding on Waste Scheme
03 February 2009
The M&A Projects Team is currently advising West Sussex County Council on a ca. £200m (capex) contract for the treatment and disposal of municipal waste over a 25 year period. Biffa Waste Services Limited was appointed as the project’s preferred bidder on 22nd September 2008. The Council has decided to adopt a “hybrid funding” structure for the project which involves the injection of short term private finance to fund construction and its phased replacement at strategic project milestones with long term public sector (“prudential”) funding, obtained from the Public Work Loans Board. The West Sussex contract is likely to be the first waste project to close on the basis of this new funding structure.
In the current financial market a number of projects (including perhaps the largest ever waste project in the UK) are finding it difficult to reach financial close. Delays are attributed to the reluctance of banks to commit to substantial and / or long term lending and / or the collapse of bank-syndicated lending for such projects, as well as fluctuating bank terms.
Ironically, in light of the criticism which the West Sussex funding structure has drawn from regulatory bodies, a leading lending bank on PFI/PPP schemes recently presented DEFRA with their own solution to the current crisis in the project funding market - short term bank lending followed by substitution of prudential funding.
Arrangements involving the substitution of public for private sector funding will no doubt have to be considered by public bodies facing an affordability gap or collapse in funding arrangements on large transactions since the savings on funding costs on a £200m project financed scheme can be as much as 25% over 30 years with a switch to prudential funding.
The West Sussex funding structure was developed in 2005 by client and advisers on the project: Phillip Russell and David Rowlands of West Sussex County Council, Steve Hazelton of Ernst & Young, Pat Wheeler of AEAT and Deryn Rees of M&A.
M&A's involvement in this ground-breaking transaction demonstrates our commitment to developing innovative solutions for our clients. For further information please contact Deryn Rees on 029 2066 3054.