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There are a number of PFI risks that, although not unique to waste, are more prominent in this sector than in some more mature PFI markets such as education and health. Waste-specific risks can have a significant impact on the client鈥檚 bid and the ability to deliver a project. Examples of risk include changes in waste law (which are often vague and subject to frequent amendment), planning permissions for waste facilities (which are particularly susceptible to challenge), permit requirements and animal health approval.

For a contractor, PFI typically means big potential losses. For example, there is usually a distinct lack of extension of time entitlements, or relief from delay damages (which in waste PFI, can be substantial). In addition to the usual liquidated damages for delay relating to additional financing costs and lost unitary payment, delays and performance failures on waste projects can lead to significant unliquidated liabilities, including for landfill taxes, gate fees and LATs penalties (which local authorities can incur for exceeding their quotas for waste to landfill). Equivalent project relief provisions, where a contractor鈥檚 entitlements or reliefs are limited to the project company鈥檚 entitlements or reliefs from the local authority, can exacerbate this risk. Here, the key to success lies not in passing risk to the supply chain (which is typically characterised by weaker, low-liability contracts), but in good contract management and understanding the technology and associated risks.

Consider carefully process and technology risk. Testing and commissioning contractual provisions are typically long and convoluted and we have seen little uniformity from project to project. Contractors, particularly those new to the waste market, need to assess what, if any, process risk they are being asked to take and how such risk can be affected by the acts of others, such as the operating contractor, or even the project co-ordinator (for example, in relation to waste composition and availability, testing interfaces and maintenance regimes).

They should also be aware of the common protections sought by contractors in this area. For example, a contractor will often make a distinction between 鈥減rocess failures鈥� and other latent defects and may seek to limit its liability for process failures during testing. It may also seek to limit the amount and duration of liability it carries for process risk after completion. Attempts at passing process risk to technology subcontractors (which are often non-UK firms that are not used to UK contracting or PFI) are likely to be problematic.

As well as the general hardening of the funding market, factors such as relatively new technology and limited residual value in any failed plant have led to a demand for more stringent security packages in the waste sector. Contractors can expect to be asked for performance bonds of up to 20% of contract value, that extend until the end of testing (which can be significantly beyond practical completion), parent company guarantees (in addition to bonds), additional bonds for advance payments and off-site goods and additional security from key technology providers (which they may not be used to providing). This level of bonding can have a significant impact on a contractor鈥檚 business and its ability to accommodate other projects.

Parties, particularly contractors, should be aware of the cash-flow profile on waste projects. As ever, funders will strongly resist front-loaded payment profiles, but the nature of waste projects is that subcontractors/ suppliers frequently require significant payment before anything is delivered to site, exposing the contractor to a negative cash flow for lengthy periods.

The prolific use of non-UK based technology suppliers can also lead to more robust requirements and restrictions on payment applications, such as vesting certificates, additional reporting requirements, audit rights and, as noted above, payment/ performance security from key supply chain members, all of which has a potential cost.

With a wealth of work and a cornucopia of waste technology out there, contractors looking to bet on the waste sector (even those with other PFI experience) should ensure they have a clear understanding of the nature and extent of the waste-specific risks involved to avoid losing their shirt.