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The construction of a waste processing plant may require tens of millions of euros in funding, depending on the scale and equipment used.
Investing in large projects can be difficult even for companies in good financial health.
Problems in attracting funding stem from the usual caution of investors.
In turn, the public sector is prone to chronic scarcity of funds, which often leads to the abandonment of environmental investments that could benefit local communities.
Innovative models for attracting external funding will help to minimize these problems.
These include waste processing plant project finance (PF) and public-private partnerships (PPPs) for environmental projects.
Customers are attracted by the off-balance sheet nature of project finance.
The creation of a separate company for the implementation of an environmental project eliminates the impact of investments on the balance sheet of a company interested in the project. As a result, the return on assets does not decrease and the company's debt does not increase.
The international company LBFL with partners implements large environmental projects in Europe, Latin America, the Middle East, South Asia and other regions of the world.
We provide clients with comprehensive financial and engineering services at any stage of the project.
Sources for financing environmental projects
Waste management is inevitably associated with significant investment costs.To preserve the environment and provide social services of public interest, flexible funding models are required.
This usually means using different models to attract private and public capital.
Project finance for the construction of waste processing plants is particularly attractive in the context of ensuring environmentally sound waste management.
Funding for a project can come from several sources. The main sources of funds for the construction of waste processing plants and landfills include private capital, bank loans and government subsidies.
The choice of financing method should be approached with caution as it has important implications for the total project value, cash flows and liabilities.
Conventional financing is in high demand for environmental projects when the customers are municipalities and government agencies. However, bank loans are issued only to borrowers with high creditworthiness and only for projects that meet requirements of financial institutions.
In essence, bank loans are funds that financial institutions provide to companies for a project.
The loan has a fixed maturity and is paid at an agreed interest rate. There are different types of bank loans, the specific characteristics of which must be assessed before applying for financing. It is also necessary to make the right choice of a reliable financial institution.
Banking financial instruments for environmental projects:
• Business loans. These are funds provided by banks and other financial institutions for the development of entrepreneurship, including for the construction of waste processing plants.
• Bridging loan. This is a short-term financing scheme (for example, during the construction of a plant) that is used until a long-term financing scheme can be implemented.
• Bonds. These are long-term debt instruments purchased either through capital markets or through private placement (meaning direct sale to a buyer, usually an institutional investor).
In general, bank financing is most applicable to small environmental projects as well as projects that are being implemented by municipalities and government agencies.
For small companies with ambitious waste management and recycling projects, bank loans can be cumbersome. Project finance using multiple flexible instruments may be more appropriate for these clients.
Project sponsors, private investors and investment funds place high demands on the profitability of an environmental project, which allows them to compensate for risks. Project finance provides ample opportunities for initiators of large projects, since in this case, investors are based on future cash flows, and not on the assets of sponsors.
When looking for investors for a project, companies should not forget that each of the potential partners has a clear goal. In general, there are four types of investors:
• Industry investors who consider the initiative in any way related to their core business. This role can be played by enterprises that generate a large amount of waste and need to recover secondary materials.
• Public investors. These can be central or local government, municipalities and municipal companies whose goals are focused on ensuring safe waste disposal.
• Financial investors who participate in waste processing plant project finance solely for the purpose of investing capital in high-yield transactions. They strive to make a significant return on their investment.
• Contractors. Some engineering companies that design, build and manage a project sometimes provide funds for construction.
In addition to this, there are other sources of funding for projects such as crowdfunding.
The latter has become very popular due to the success of online platforms that allow promoting environmental initiatives around the world.
Public-private partnership in environmental projects
Public-private partnerships (PPPs), similar to project finance, are becoming increasingly popular.It is used to finance large projects with the participation of several parties, including the state.
Within the framework of PPP, representatives of the public and private sectors work closely with each other. This cooperation is usually long-term. Public-private partnerships are widely used to implement housing and communal services projects and waste management.
Participation in projects benefits both parties.
Typically, government pays attention to the end result in social and environmental terms. Here, low costs, high efficiency and innovativeness of the task (waste processing) are especially important.
If the risk associated with the implementation of an environmental project lies with a private company, it will look for the best methods of managing and implementing the project. Experience shows that in these cases, funds will also be spent more efficiently.
The transfer of responsibility to a private company will enable the public sector to focus on regulatory functions, planning or monitoring projects serving national and local objectives.
For a private company, participation in a public-private partnership project is an opportunity to attract funding with high guarantees of debt repayment. Moreover, it is an opportunity to win important tenders.
Later, there is an additional opportunity to take over the maintenance of the waste processing plant.
In addition, the involvement of the state in the investment process accelerates the implementation of environmental projects in which it is necessary to obtain appropriate concessions and permits.
Bank lending and public-private partnerships are not the only opportunities for implementing environmental projects. Innovative multi-source project finance models are often used today for the construction of waste processing plants and landfills.
Our team successfully implements large environmental projects.
We are ready to help clients using innovative financial models and business contacts in many countries around the world. We develop individual financial solutions to cover up to 90% of the investment costs of the project.
Waste processing plant project finance: features
Project finance is applicable to large projects requiring large investments.The origin of this method dates back to the 13th century, when England negotiated a loan to develop the Devon silver mines.
In recent history, this method has become popular in the 1980s as a means of financing projects designed to meet infrastructure needs in emerging markets. In 1989, there were 170 known large projects financed with this technology, worth more than $ 23 billion. One of the most important among them was the Trans-Alaska Pipeline System project.
Project financing is actively developing simultaneously with the discovery and implementation of new methods of financial engineering in practice and is applied mainly to projects in which the construction and operation time is relatively long.
In recent decades, the disappearance of the secondary market for project debt has become a fundamental change in the project finance market. Before the Global Crisis, banks often pooled new debt into off-balance sheet instruments that were subsequently sold to investors.
Since 2008, some banks have refused to guarantee bonds for fear that they would not be sold on the secondary market. The crisis has transformed the process known as securitization.
Today, project finance can be used in various spheres of economic activity, but most of all it is used in areas such as electricity and waste processing, roads and transport. Project finance allows large public sector investments to be transferred to the private sector.
The rise in private investment in waste management and the government's tendency to reduce budget deficits have fueled the development of project finance, as it allows large projects with high capital investment to be implemented.
Project finance is defined as a financing mechanism for large-scale investments, which is based on both the ability of the project to generate cash flows and contracts between multiple stakeholders that ensure the profitability of the project. These projects are characterized by the use of fairly mature, well-known technologies.
This financing mechanism for an economically independent project is designed in such a way that the project's cash flows provide debt service and serve as a source of profit for investors.
Project finance participants and their roles
Unlike bank lending, project finance for the construction of waste processing plants is carried out using a complex system of several participants, each of which plays a specific role in the project.The complexity of this method involves setting up a company and engaging multiple stakeholders:
• Special purpose vehicle (SPV). It is an independent company that is specially created for the construction, ownership and operation of a facility. SPV acts as a borrower of resources for the project. The financial risk of the project sponsors is reduced to the contribution to the SPV, so that the debt is secured only by the project's assets and its cash flows. The most appropriate legal form for a project company will depend on the country, although it is usually a limited liability company.
• Initiators or sponsors of the project. These are the participants who initiate a waste recycling plant project, carry out feasibility studies and take on the task of starting a new company through a suitable mechanism, be it a consortium or a joint venture.
• Financial investors. These participants act as full partners in the project, trying to achieve an acceptable rate of return on investment.
• Lenders. Lenders are usually the most important source of funds for a project. These can be local state and private banks, international commercial banks, development organizations, etc.
• Contractor or engineering company. It is a specialized company capable of guaranteeing the construction and launch of a waste processing plant. Typically this company acts as the general contractor under an EPC contract with a fixed price and commissioning time. This contractor, in turn, enters into contracts with numerous subcontractors for the production and supply of equipment, certain types of work.
• Suppliers. Long-term contracts are signed with suppliers for the purchase of the necessary materials and equipment to ensure the completion of the project. Contracts are also made with waste suppliers and buyers of the recycling plant's products (in the case of waste recycling or energy production) to ensure the safety of cash flows.
• Operator company. Nowadays, specialized firms are often hired to properly operate and maintain large enterprises.
• Consultants. Given the financial, technical, and legal complexities of projects, stakeholders are hiring finance, legal and engineering companies to help guide decisions.
• Municipality or government of the host country. Given the need to free up resources for the social sphere, the state is interested in promoting this method for the implementation of environmental projects. In the case of the construction of a waste processing plant, the state shifts the risks to the private sector and at the same time ensures that the project works adequately in the public interest. In addition, it promotes capital inflows, revitalizes the economy, and enhances technology transfer.
New project birth and feasibility studies are initiated by the project sponsors, which may include a private company or government.
However, in order to structure the financing of the construction and operation of the waste processing plant, a dedicated project company, independent of the sponsors, is required to raise funds.
One of the main features of project finance is that project assets, associated contracts and project cash flow are separate from the parent organization.
On the one hand, loan guarantees do not compromise the assets of the settlor.
On the other hand, the project is protected from possible bankruptcy of the sponsor.
In conventional finance, the project is implemented within the parent organization, so creditors consider its entire portfolio of assets as collateral for the loan.
Since the SPV is set up as a new independent company, it has no operating history at the time of the loan. The potential of an SPV depends on sound and reliable due diligence to ensure expected profitability, as well as indirect support provided by third parties through appropriate contractual relationships.
Among some contractual agreements that serve as a guarantee of project finance, experts name long-term contracts for the supply of waste and the sale of products.
With regard to the supply of waste, fuel and electricity, they must be available in the quantities necessary for the project to operate at its design capacity for the entire duration of its planned operation. Consequently, long-term contracts must be signed for periods longer than the arrears, unless the enterprise owns the resources (a plant that generates waste for further processing).
Waste processing plant project finance requires professional financial engineering to raise funds on favorable terms and to efficiently share risks between stakeholders.
Lenders need assurance that the project will operate at full capacity and therefore require independent judgments on economic viability from engineering consultants, especially if the project involves untested technology, extreme environmental conditions, or unusual waste.
Lenders also need to be confident that the project will generate sufficient cash flow to pay off the project debt and receive an acceptable return on investment. The cash flow must be sufficient to keep the project profitable in the face of adverse situations such as rising production costs, delays in construction or start-ups, higher interest rates, and fluctuations in production levels, prices and operating costs.
On the other hand, any large environmental project needs skillful and experienced management.
Some companies enter into contracts for the provision of professional management services for several decades, that is, for virtually the entire life of the waste processing plant.
The role of government agencies in the construction of such enterprises can hardly be overestimated. For most developed countries, effective waste management has now become one of the national priorities, and government agencies and municipalities are strongly encouraging the development of waste recycling.
According to European studies, changes in host country legislation and policies, corruption and deficiencies in legal structures represent the main risks for projects implemented using this financial model.
Waste processing plant project finance benefits
Our experience in implementing environmental projects around the world shows that project finance is most beneficial in the following cases:• Waste treatment services are in high demand, so before the start of the project there are clients willing to sign long-term contracts.
• The contracts contain provisions that are strong, reliable and attractive enough to motivate banks to finance a project based on these contractual agreements.
Thus, project finance for the construction of a waste processing plant can be beneficial for a developed country that has limited reserves of natural resources, but sufficient waste suitable for recovery of secondary materials.
Many managers and business owners are faced with the question: what are the advantages of project finance over conventional finance?
This scheme allows attracting significant investments.
For example, the EBRD finances up to 35% of the cost of greenfield projects.
The models we offer allow us to provide up to 90% of investment costs through external financing on favorable terms.
It has been proven that project finance is a very useful tool across a wide range of economic sectors and is becoming increasingly relevant for emerging economies. This method now accounts for half of capital investment in large projects in developed countries.
Table: the main advantages and disadvantages of waste processing plant project finance
| PF advantages | PF disadvantages |
| Raising borrowed funds through SPV, which is fully responsible for all debt. A clear separation of project assets from the sponsor's assets frees the lender from the risk of the sponsor's bankruptcy. | Higher cost of borrowed funds, because debt repayment is associated only with the success of the future project, and its participants seek to compensate for the risk. |
| The possibility of attracting much more substantial funding than is possible with traditional financing through bank loans. | The organizational complexity of project finance requires higher transaction costs. |
| Longer debt maturity. The payback period for large investments is longer, which has a positive effect on the debt maturity. | |
| Flexible debt repayment schedule. Traditional models are characterized by the fact that the maturity of the debt is strictly defined. In the case of project finance, debt repayment may be adjusted in line with projected cash flows. | |
| Optimal distribution of project risks between stakeholders. |
Obviously, every project requires an individual approach.
This method should be used when a lower cost of capital after tax is expected than in traditional finance.
In each case, our experts conduct a detailed analysis of the advantages and disadvantages of financial models, offering the best option.
To learn more about LBFL financial services, contact our advisors.
