Focus: Don't let waste go to waste

Against the backdrop of the recession, a small number of formerly overlooked sectors have emerged as strong investment themes with long-term drivers that provide opportunities for stable growth and increasing returns for the professional investor. As unglamorous as it may be, waste management is one of them.

Waste is not going to disappear. Waste creation is tightly coupled with living standards, and these continue to rise. In as little as nine years, the UK could run out of landfill space completely. Add to this a host of established legislative drivers, and the opportunities for waste-management companies multiply.

One such driver, the EU Landfill Directive, mandates the pre-treatment and sorting of waste and sets targets for its diversion from landfill. In the UK, landfill diversion targets are being achieved via a landfill tax escalator. Currently at £40 per tonne, this must be paid on top of gate fees, which are roughly £25 per tonne, on average. In the recent Budget, it was announced the tax would be increased by £8 per year until 2013.

Though a headache for waste producers and local authorities, these fees and taxes represent opportunities for sustainable waste-management companies and their investors. Local authorities will have to source the services of these companies in the form of medium to long-term contracts or face paying excruciating fines on top of the cost of disposal.

Strong market drivers, contracted revenues and rising prices make the sector attractive to equity, debt and infrastructure investors alike. Nigel Taunt, managing director of venture capital at Impax Asset Management, suggests £1bn per year is the absolute minimum investment needed in the sector over the next 10 years to ensure landfill diversion targets are met. He thinks the financial penalties imposed on waste that ends up in landfills are reaching the point where new waste treatments are becoming more economical than simply landfilling. "Prices are moving into profitable territory - as we start moving above £70 per tonne, the story gets much more interesting," he says.

Certain technologies will emerge as winners, capturing the lion's share of this investment. The challenges of building further traditional waste-disposal units such as incinerators are well known: facilities need to operate on a huge scale to make economic sense, creating major logistical and pollution problems; the planning process for such projects is lengthy and unwieldy; and public opposition often stems from health concerns associated with mass burn.

More innovative ways are needed to treat waste, recycle it or unlock the energy within it. Larger companies that dominate the traditional waste-management landscape are not adapting to these needs - smaller, more flexible companies are emerging to fill the gap with high and low-tech solutions. Some companies, such as New Earth Solutions, combine both approaches: the company has three operational in-vessel composting facilities in the UK and a pipeline of more than 20 other projects, either in construction or planning stages. Its sister company, New Earth Energy, is looking at innovative waste-to-energy technologies, including gasification and pyrolysis.