Excessive arrangement fee "highest I've seen".

by DOUGLAS SHEPHERD

A consultant working for Scottish Borders Council on their ill-fated £23 million waste treatment project claimed the arrangement fees for loans from an Isle of Man fund chosen to bankroll the scheme were the highest he had seen for any funding package he'd been involved in.

The extensive collection of email traffic associated with the proposed waste plant at Easter Langlee, Galashiels is being made public for the first time, having been protected by a six-year confidentiality agreement signed by the project partners in 2015 when the job was abandoned.

Not Just Sheep & Rugby has already published details from some of the 300 documents released by SBC in response to a Freedom of Information request. We have also continued to take a keen interest in a lengthy investigation by liquidators into the affairs of the controversial Manx "environmentally friendly" investment fund New Earth Recycling & Renewables [Infrastructure] Ltd., known as NERR.

This was the financial outfit which was supposed to come up with the cash for the Borders project after NERR's partners New Earth Solutions Group (NES) were awarded a £65 million contract to deal with the region's rubbish over 24 years from 2011.

But, as readers will know, NERR failed to find the money while NESG could not get their advanced thermal treatment [ATT] technology to work satisfactorily. The Galashiels venture collapsed in 2015 when SBC finally pulled the plug after spending at least £2.4 million without a brick being laid. Soon after both NESG and NERR became insolvent with huge debts.

NERR is now the subject of a report by liquidators which has been lodged with the Isle of Man's High Court of Justice, detailing factors in the run up to the company's collapse "which warrant further investigation."

As we reported in November, NERR joint liquidators Alex Adam and David Craine told hundreds of creditors who are owed an estimated £220 million: "We have sought legal advice as to whether it would be possible to share the contents of the report with creditors and investors however we are advised that, as it is a report to the court, it is confidential and cannot be shared."

Within a year of landing the SBC contract NES asked for it to be radically altered, claiming the original concept of building a stand alone Materials Recovery Facility (MRF) at Easter Langlee was no longer viable. Instead they wanted an ATT [advanced thermal treatment] incorporated to make the deal worthwhile.

After months of behind the scenes negotiations during 2012 councillors signed the Deed of Variation (DoV), allowing the revised scheme to proceed. Unfortunately it never did. But it is now clear there were serious reservations about some of the changes, including the updated funding model.

While the identities of many of the individuals sending and receiving emails at this time have been redacted in the versions provided under FOI it is clear that NERR's fees were a matter of concern for Nevin Associates, the consultants paid £143,000 by SBC for financial advice for the waste treatment plans.

In August 2012 - before the DoV was sanctioned - Nevin Associates told the council: "I've now undertaken a comparison between the updated NES project financial model submitted by (name redacted) on Tuesday, and the original April 2011 Financial Close model."

After pointing out there had been a lot of movement on capital costs, tonnages and third party revenue streams, the consultant wrote: "Yet despite all of these movements, the Project IRR (Internal Rate of Return) is identical to that in April 2011! It doesn't take Sherlock Holmes to work out that it is just possible that the model has been massaged to come out with the same answer!"

In a detailed assessment of the new financial arrangements Nevin states: "For the record, among the most significant movements are the following:

"1. The capital cost of the MRF seems to have fallen slightly in real terms, from £12.886 million in April 2011 to £12.609 million today.

"2. The capex (capital expenditure) of the ATT also seem to have fallen, from £6.765 million in April 2011 to £5.466 million today – and in addition we have far less detail of how this is made up, with the largest single element being ACT/power equipment at £4.5 million, but no breakdown of this cost.

"3. However, this is balanced by an increase in professional fees and funding costs. Professional fees have risen from £500,000 to £1.061 million, and in addition under "funding costs" there is a provision for £751,000 of advisers costs, so effectively it would appear that advisers’ costs have increased more than threefold.

"4. In addition, the arrangement fees payable to NERR have risen from £650,000 in April 2011 to £957,000 today (a 47% rise in about 15 months), most of which is made up by an £825,000 (5%) arrangement fee on the Class 2 Loan Notes. This is the highest arrangement fee I have seen in any funding package in which I've been involved, and does seem excessive.

"5. We need to confirm with (redacted name) whether NES are still actively pursuing bank finance – which would definitely be cheaper than NERR finance, both in terms of the interest that would be charged – with a 12% rate payable on the NERR Class 2 Loan Notes, and an 8.75% interest rate payable on the Class 1 Loan Notes – and in terms of the arrangement fees – with an arrangement fee of 5% payable on the Class 2 Notes, and 3% on the Class 1 Notes.

"6. Following from this, I presume that we are still entitled to a share of any refinancing gains as provided in the April 2011 PA [Project Agreement]. In which case it is definitely in our interest to push for bank financing in place of NERR."