Impact of the Victorian Government’s Circular Economy Policy on Infrastructure Investment in the Waste Sector
Background
The waste industry has received significant attention in recent years partly due to constraints on domestic waste infrastructure. As the Australian population grows, and communities seek more sustainable methods to manage their waste, the demand for waste infrastructure is high (a fact recognised by Infrastructure Australia in their recently released 2020 infrastructure priority list).
Despite investment appetite, there have been some barriers to investment which has stunted growth in waste infrastructure across Australia - and a key barrier has been policy and/or legislation that is either uncertain or inappropriate. On Wednesday, 26 February 2020, Victoria released its much anticipated circular economy policy, Recycling Victoria: A new economy (“the Policy”). Release of the Policy clarifies some of the uncertainty in Victoria, while raising some new questions for investors.
The Victorian Government has explicitly stated that the purpose of the Policy is to “drive investment, jobs and increase the waste and recycling industry’s processing capacity”. This note considers the type of infrastructure impacted by the Policy and how the Policy might stimulate investment in the sector.
Types of waste infrastructure in the circular economy
The most dominant forms of waste infrastructure in Australia are transfer stations, materials recovery facilities and landfills. There are also other forms of infrastructure on a smaller scale, such as plastics recycling and organic composting facilities. The existing infrastructure represents the traditional linear economy mindset that has described the “waste” mindset - take, use and throw away.
A circular economy seeks to reduce the environmental impacts of production and consumption, reducing reliance on natural resources and focusing attention not on “waste” but on avoidance and reuse. It promotes business models that involve efficiency, such as sharing, or supplying a product as a service.
From an investor perspective, the circular economy presents a greater variety of infrastructure investment opportunities, including:
product design and packaging facilities
collection points
transfer stations
sorting facilities
reprocessing facilities
recycling facilities
waste to energy facilities
landfills
other waste treatment facilities (including liquid waste treatment plants)
transport logistics hubs (including intermodal facilities).
How the Policy has responded to what infrastructure investors require
We work with industry and institutional investors in the waste sector who tell us that their prerequisites for investment in the sector include:
regulatory clarity and certainty
profitable returns
markets/product demand
long-term commitments
scale.
The Policy will help to address these prerequisites and is a comprehensive, multi-faceted action plan. With the Policy, and its supporting programs and regulation, the Victorian Government has committed to the following actions of relevance to infrastructure investment:
announced an increase to the landfill levy to $125.90/tonne (almost double the current rate) over a three year period
introduced a Victorian Infrastructure Fund to support investment in waste infrastructure
announced the introduction of increased source separation of waste, including a separate bin for organic waste streams for households throughout Victoria
mandated recycling by businesses
establishment of a new dedicated waste and recycling Act that governs waste and recycling services (i.e. regulate waste as an essential service)
addressed the lack of an appropriate waste to energy policy by:
explicitly encouraging investment in appropriate waste to energy facilities that reduce the need for landfills
placing a total cap of one million tonnes each year on the amount of residual waste that can be used in thermal waste to energy facilities in the State
encouraging precinct-scale waste to energy facilities
stating that the need for biological waste to energy treatments, such as anaerobic digestion, will be critical and a priority for the Victorian Government when leveraging investment in waste to energy infrastructure
attempted to introduce initiatives to stimulate demand for end markets of recycled products including:
initiatives to help businesses identify new uses and trial new products containing recyclable materials. “Recycling Markets Acceleration package” to support collaboration between industry, universities and government for research to develop new products made from recycled materials such as glass, plastic, organics, paper, cardboard and tyres. This investment will stimulate new markets for recyclable materials by also developing product specification, improving quality standards and industry accreditation
a commitment to develop and promote standards, specifications and guidance for using recycled materials
introduced the concept of a $7 million Business Innovation Centre to support businesses to transition to a circular economy.
Aspects of the Policy that will attract infrastructure investors
In our view, infrastructure investors will be pleased with many of these initiatives. At the outset, the commitment to, and endorsement of, an improvement in infrastructure provides the policy certainty that was lacking.
From a project economics perspective, the increase in the levy will make more projects viable as they are better able to compete with landfill. This should enable long-term waste supply contracts to be signed to underpin projects. Although grants do not alone make the difference in an investment decision, we expect that these funds will enable technology providers to trial and improve available technology and assist businesses with transitioning their practices and mindsets, all of which will support infrastructure decision making.
One of the key barriers to investment in recycling infrastructure is the lack of a demand for the end product. The Victorian Government's commitment to stimulating demand for end markets is welcomed. To the extent the Government’s own procurement policies enable Government to commit to offtake recycled products (e.g. roads), this can make the difference between a project proceeding or not. The procurement commitments made in conjunction with the release of the Policy, (buoyed by similar efforts announced by the Federal Government on 3 March 2020 about steps it is taking to improve demand for recycled products), are a key step to overcoming this investment barrier.
The commitment to improved waste sorting at source will either be welcomed or not depending on the infrastructure in question. For example, food waste infrastructure will welcome the addition of a separate organics stream which will address, to some extent, one of the biggest issues for organics infrastructure, being waste stream contamination. On the other hand, source separation will reduce the volumes available to thermal waste to energy projects.
Features of the Policy infrastructure investors need to know more about
There are some actions detailed in the Policy that require further explanation.
For example, the one million tonne per annum cap on waste that can be processed through a thermal waste to energy process needs further explanation. Does it mean that the projects that are already approved are “first in line” or will there be some form of ballot system employed? Will the Government’s recent experience with the impacts of a majority of the state’s recyclable waste going through one provider (i.e. SKM) cause it to put a cap on the percentage of the one million tonnes that any one facility can process? Further clarity on these aspects of the Policy will be well received.
Further information is required about the proposed Waste Management Authority (WMA) and what its purpose, jurisdiction and focus areas will be. For example, will it address delays, complexity and risks associated with regulatory approval processes (i.e. planning, building, environmental works approval, scheduled premises, appeals, etc.)? The need to engage with multiple tiers of Government and stakeholders (ultimately increasing transaction costs) has been highlighted by investors as a barrier to investment. On the other hand, will the WMA assist with improving sophistication at the local government level in large-scale procurement? (This is important in circumstances where the local government controls a large proportion of waste flows in the state.) Additionally, how will the regulation of waste as an essential service impact company operations and profitability, and what format will the broader legislative framework adopt?
Conclusion
The Policy is a welcome development. The devil, as always, will be in the detail and in the Government’s own adoption of the commitments set out in the Policy, in particular with respect to offtake of recycled products and speed of regulatory approval processes.