The Big Story: The UK has been a bit tardy when it comes to moving away from landfill. By and large we've favoured building more landfill sites rather than working out a sustainable way to recycle more waste in the long term. But pressure from both Brussels and Whitehall will change all that over the next decade and local councils have to do something fast. Each waste disposal authority has been allocated an allowance of biodegradable waste that it can dispose of via landfill up to 2020. Any authority that goes over its allowance will have to pay a penalty charge of £150 per tonne, in addition to the cost of disposing of the waste. Whitehall is also hiking the tax it already levies on landfill. The standard tax rate of £24 per tonne is due to rise by £8 per tonne per year until it hits £48 a tonne in 2010-11. According to investment analysts at Catalyst, this will translate into a massive boom in spending on landfill technology and services - the UK will have to invest £9bn in incineration, recycling and waste treatment facilities to reduce the waste dumped in landfill to hit all those targets by 2020.
The Big Fact 1: Here in the UK, we recycle just 37 per cent of our waste, compared with 50-60 per cent across much of mainland Europe. The UK is now required under the EU Landfill Directive to reduce the amount of biodegradable municipal waste going to landfill sites, as follows:
• to 75 per cent of 1995 level by 2010
• to 50 per cent of 1995 level by 2013
• to 35 per cent of 1995 level by 2020.
The Big Fact 2: To meet these targets we'd need to incinerate 11.5m tonnes, which would require at least 50 incineration facilities.
Luckily for local authorities, technology may just be about to come to the rescue. Scientists and engineers have been working on various innovative ways to recycle all the waste going into landfill for decades, but the most efficient answer may be to gasify the waste and turn it into heat and power. The technology has been around for years, but it's only now becoming commercially viable. The technologies of choice include: Plasma arc gasification, which uses high electrical energy and high temperature to break down waste into gas and solid waste; standard gasification, which works in a similar way and produces gas that can be burned; and finally mechanical biological treatment (MBT) technology, where household waste is mechanically separated to remove recyclable material such as glass and metals, with biodegradable material digested to produce a stabilised landfill cover or fuel pellet.
The crucial thing is that all these technologies work already - it's just a matter of getting the economics to make sense. As new technologies come on stream, the cost of these novel waste treatments will collapse. The bottom line? As the costs of new technologies tumble and new regulations start to bite, you should see a flood of new private finance initiative (PFI) projects up and down the country, prompting a flurry of deal-making - like the recent Biffa takeover, for example.
How to access the theme: There's no substantive index in this sector, although SocGen does boast its own - not widely used - SGI Global Waste Management Index. This index is 7 per cent invested in disposal, 42 per cent in treatment, and 20 per cent in recycling and includes big global blue-chips such as Waste Management Inc of America, Veolia, Sims Group and Allied Waste Industries. It's not currently tracked by any index provider in the US or the UK.
If you want to access this sector, buying individual company shares may be your best option. Following Biffa's takeover, Shanks is firmly in the frame alongside Pennon's fast-growing Viridor operation. Shanks in particular looks compelling as it already has MBT plants up and running in east London and Dumphries/Galloway, plus it also boasts an interesting portfolio of divisions throughout Europe that are bound to be heavily affected by regulatory changes. Smaller second league players, with more of a focus on gasification technology itself, include Augean (valued at £53m), which is building a portfolio of businesses, and Prometheus Energy, a microcap that already has gasification plants in operation in the US and Poland and is rapidly building up sales and market recognition for its technology. One other leftfield player worth watching is Novera Energy, which has been on the receiving end of offers from 3i but is back in play and boasts a strong portfolio of assets in this field, plus some wind farms as a bonus. It's also worth watching out for a whole host of new technology companies that are beavering away in this sector, and about to list on the Alternative Investment Market (Aim) - in particular Advanced Plasma Power.
Leftfield ideas: Take some time to track the fortunes of Libra Natural Resources, which is transforming itself into a specialist recycling business manufacturing wood pellets out of the waste of wood mills. It's building up a powerful global position in this niche sector and is headed by green stalwart Mark Campanile, the hugely successful manager of Henderson's range of SRI funds.
Caveats: We've already mentioned Augean. This company sums up the wariness of some investors looking to invest in this sector. Although waste management is big business globally - the SocGen Global Waste Management index has consistently beaten the MSCI World Index (up 16 per cent a year over the past five years) - Augean has proved that not all muck gets turned into brass. It has serially disappointed the City in a business where smooth execution of a business plan is essential.
