With a litany of profit warnings and now the threat that one of the UK’s biggest contractors could breach its banking covenants, Interserve’s problems have once again shown how mishandled contracts can bring a business to its knees.
The key issue for Interserve is how to stem the losses from its EfW projects that have haemorrhaged cash – nearly £200m so far.
Despite having announced its exit from the EfW sector, Interserve still has financial stakes in numerous UK projects.
According to analysts Liberum, the company’s EfW interests include £17.5m in a PFI in Derby, £43.8m in plants across Essex, £96m in another in Gloucestershire, and £20.5m in a plant in Birmingham.
Speaking today, Interserve chief executive Debbie White admitted that EfW contracts were a “complex” area, as they involved “significant assumptions around the timing and completion of projects”.
A big question is: why are EfW plants causing so many headaches for Interserve and the wider industry?
Encountering problems on EfW schemes is not a phenomenon unique to Interserve.
Balfour Beatty’s £500m scheme in Gloucestershire has been beset by difficulties and delays, for example.
Elsewhere, Amey has indicated that it has faced issues with EfW plants. In May it was announced that the firm and Isle of Wight Council had started work on a new waste treatment facility, for which moving bed incineration was chosen as the method of generating energy from waste. This change was due to ongoing difficulties with its early gasification system.
“Finding the right partner, understanding responsibilities and working to your individual strengths to collectively deliver a project is key”
Bob Vickers, Clugston
A recurring problem with a succession of EfW schemes has been trying to ensure certain key technologies – particularly the gasification process that is needed to drive the plant – can be delivered.
In April 2016 US-based firm Air Products, which had entered the UK EfW market with two schemes in the North-east, also cut its losses in the EfW business.
Up to that point, Air Products had been developing two EfW plants in the Tees Valley that would have taken a combined 700,000 tonnes of waste – roughly the equivalent of that produced by Hull – per year.
However, despite investing heavily in the market, in early 2016 Air Products announced that it was no longer in the best interests of the firm to develop the technology. It subsequently failed to find a buyer for the project.
That decision cost Air Products around $1bn (£700m at the time) and led to hundreds of job losses in the region.
Clare Hatcher, partner at law firm Clyde & Co said that EfW suffered from a number of issues: “I think one of the problems with EfW is that some of the technology is risky such as the gasification route. It is not developed enough. If you look at the Tees Valley project, it suffered from design problems.”
“There are also scaling up issues with gasification. One problem is that you can’t scale up the technology so that EfW will never contribute as much energy into the grid as was hoped.”
For Interserve, delays and cost overruns have caught up with the contractor.
In May the firm said the £145m Derby EfW plant (pictured) could be delayed by up to a year following the insolvency of one of the project’s key subcontractors.
Energos had been due to deliver the gasification technology for the Derby plant; however, cashflow issues from problem contracts meant the firm had to be placed in administration in July 2016.
Interserve is exiting the EfW sector, but the legacy contracts such as Derby continue to weigh heavily on the firm. In February, then chief executive Adrian Ringrose admitted that assessing the impact of its EfW contracts was “extremely complicated” and in some cases “developments are interwoven across more than one contract”.
Despite the problems with the technology, EfW projects can be made to work. Clugston is one contractor that has taken on the sector and thrived, with the firm appointed to build a £252m EfW plant in Bristol as recently as April.
Commenting on EfW, Clugston chief executive Bob Vickers told Construction News earlier this year that splitting risk was crucial.
“The difference between what Clugston do and what others do in the EfW arena is simple: we do not take process risk – we do only what we are good at, which is the building and civil engineering aspects of the project, creating the environment in which the process contractor can undertake their installation,” he said.
“Finding the right partner, understanding responsibilities and working to your individual strengths to collectively deliver a project is key.”
Another plank of Clugston’s success was that the firm struck up an effective partnership with French firm CNIM. It split risks logically, with Clugston solely responsible for civils work, while the tech partner takes on the challenge of delivering technical aspects and process risk of the plant.
Whether Interserve is over the worst of its EfW woes remains to be seen. But despite the opportunities on offer, EfW now appears to be a poisoned chalice in the UK’s energy construction market.
How did EfW bring Interserve to its knees?