Capitalising on opportunity in a transforming waste sector
by Chris McLean
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Rapid industry transformation can be tough on small businesses, but it can also create lucrative opportunities.
In Australia’s changing waste sector, hundreds of small to medium businesses, often owned and run by families, make up as much as 60% of the industry. These businesses will need sources of significant capital to keep pace with the new regulations, expectations, technologies and equipment required for modern waste management in a transforming industry.
Despite these risks and challenges, some canny businesses are already profiting from the waste boom, selling to keen investors at unforeseen valuations.
Change and growth in Australia’s waste market
The transformation of Australia’s waste market is being driven by changes in the global market, including the China National Sword, and by our society’s ever-increasing awareness of the environmental challenges of processing waste. These forces have culminated in Australia banning the export of waste plastic, paper, glass and tyres.
Despite increased social awareness of key principles of a ‘circular economy’, metropolitan solid waste (MSW), commercial and industrial (C&I) and construction and demolition (C&D) waste continue to increase in volume along with population growth and economic activity. As demonstrated throughout the pandemic, when economic activity is forecast to decline, governments typically invest in infrastructure to maintain employment and stimulate economic growth, which also maintains growth in the overall waste streams. That is, while C&I volumes decline, C&D volumes pick up.
In recycling alone, it’s estimated that an additional 645,000 tonnes will need to be processed domestically by 2024. PwC estimates that this is the equivalent of nearly a third of all of Australia’s waste being collected today.
For organic processing, a national target of diverting 80% of organic waste away from landfill by 2030 will see an additional 4.1 million tonnes per year needing to be processed.
PwC analysis indicates that $3.5 to $4.2 billion will need to be invested in new waste processing infrastructure to develop Australia’s onshore organic value chain to process at this capacity.
With such unprecedented demand for environmentally responsible waste management, and with strong projections for ongoing growth in onshore waste processing, all segments of Australia’s waste sector will need to invest heavily in new infrastructure.
Funds are the key to unlock growth
Growing a business and keeping pace with change requires capital. Small to medium enterprises involved in waste processing have typically accessed funds through reinvesting profits or borrowing. Borrowing often involves collateral against personal or family assets, which transfers business risks to the family and introduces risks of passing financial liabilities to the next generation. This approach, especially in the absence of a deep understanding of the project financing market, can inhibit the ability of small businesses to access the capital they urgently need for growth.
An alternative option is to sell all or part of the business, capitalising on the current interest of prominent and emerging infrastructure investors in the waste sector.
With large infrastructure funds and institutional investors having a need to deploy capital and promote environmental credentials, a compelling value proposition exists for well-capitalised funds to acquire a number of small to medium industry participants to develop an integrated waste processing business. A high-quality infrastructure asset with resilience across the business cycle, uniqueness of locations or limited operating licences is likely to present an attractive risk profile for an infrastructure investor.
Existing businesses with established waste management assets, long-term contracts and strong environmental credentials are well positioned to take advantage of these circumstances, and will have the upper hand on new market entrants, who face uncertain lead times for Environmental Protection Authority licences and land development approvals.
However, existing market players shouldn’t take this prime position for granted. If they cannot access the capital to invest in new waste processing infrastructure, they will miss the opportunity to take advantage of the market transformation and could be outgrown by their competitors.
Simple measures can make a big difference
For small to medium businesses wishing to attract investment, these practical actions will increase the likelihood of success.
Institutional investors will be looking for reassurance against the potential reputational risks involved in the waste sector – such as odour issues, fire risks, hazardous materials, contamination, and environmental management. Small waste businesses that invest in systems and processes and spend time formalising and documenting their governance arrangements will give institutional investors greater confidence. An investor will need to see that a business isn’t relying simply on its own informal track record of its historical processes and arrangements, even if these had been acceptable in the past. Just as the industry is changing, so too is the risk landscape. Comprehensive, well-documented governance records, policies and procedures will be expected.
Documentation of all engagement with regulators, particularly the EPA, will be essential. It’s also important that all arrangements with other parties are formally documented. Verbal communications and handshake agreements may have served their purpose once, but in a modern industry there is no substitute for solid, well-managed documentation.
Another critical element will be well-developed financial reporting that clearly aligns to business risk and to infrastructure characteristics. Investors will be keen to understand which elements of the business activities are high risk or low risk, and how they match with revenues and costs. The best way to deliver this information will be through well-prepared management cost allocation reporting. Few investors will be motivated to navigate through opaque data; they’ll be looking for information that is adequately detailed, tells a clear story, and is presented to a high standard.
Admittedly, for many small businesses, governance and financial information management may have developed in a rather ad hoc fashion over many years. These systems and processes are not revenue-generating activities so may not have been priorities for investment in the past. However, with a small financial investment and with the right advisor committed to a model of shared success, significant long-term value can be created.
Ultimately, private investment will be the key to unlocking the transformation of Australia’s waste sector – and it will be to everyone’s benefit: industry players, investors, as well as our communities and environment long into the future.
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