Private Finance Initiative, or PFI, is big news in the world of waste – and it is set to get bigger as it becomes an ever more important factor for local authorities when developing new waste facilities in order to meet government recycling and diversion targets.

Although private-public partnerships are already used in the construction of UK schools and hospitals, they had, up until a few years ago, been largely ignored in the waste industry as an unattractive financial proposition. But with 22 waste PFI projects signed since 1998 – totalling over 881 million PFI credits – and more in the pipeline, PFI is being touted as the answer to funding new waste infrastructure and its associated problems.

PFI is one type of Public Private Partnership (PPP) specifically used in central and local government that consists of a competitive bidding process in the same way as tenders are. The ideal behind PPPs is to bring public and private sectors together in a long-term partnership for mutual benefit. In such a partnership, the private sector is, for example, able to borrow money to pay for a major capital build, construct it and take on operations and financial risk. In return, the government makes payments for the project over a set number of years.

Implemented under the Conservatives back in 1992, PFIs were proposed as a way of involving private companies in the funding of new schools and hospitals, with the taxpayer paying an annual ‘rent’ for the privilege. The idea was embroiled in arguments – with those opposed claiming that this was a form of back door privatisation of public sector operations and the next step would be the transfer of actual services. Nevertheless, the financial benefit to central government was attractive – as funding originated in the private sector, it did not appear on the government books as debt.

The support from central government is given in the form of PFI credits. PFI credits are allotted to projects that are considered value for money, can meet current legislative targets and provide continuous improvement over the long-term.

However, in order for a PFI project to be financially attractive to both partners, contracts are usually 25 years and upwards. This is not unusual for waste contracts, but with a rapidly changing environmental agenda, the way waste is processed in 10 years may be very different from today, so inflexibility within a contract could prove costly.

Indeed, new technologies in the UK are still in their infancy and bidders often find it difficult to gain financial backing for what are, in the bank’s eyes, ‘unproven’ processes, even though they are operating successfully across Europe. There are, therefore, significant costs involved in putting forward a PFI proposal, and the time-consuming bidding and planning process can sometimes take years, whixh makes the opportunity seem unattractive to companies.

In order to meet legislative targets, local authorities have been accused of making PFI contracts too ambitious, thus reducing the number of bidders prepared to take on the risk.

In spite of these barriers, PFIs are proving popular. In March this year, Global Renewables Ltd and contractor Bovis Lend Lease signed a deal worth £2 billion with Lancashire and Blackpool county councils. It is the biggest UK PFI waste contract to date and will see construction of two cutting-edge waste management facilities at Leyland and Thornton in Lancashire, capable of handling some 600,000 tonnes of household waste per annum.

In June, it is expected that the biggest waste PFI deal will be signed between the Greater Manchester Waste Disposal Authority, Viridor and Laing construction. Worth approximately £4 billion over 25 years, the contract will deal with around five per cent of total UK household waste.

With profit margins on the increase, it seems private companies are taking a renewed interest in PFI and that should result in more competition and, importantly, best value.