By Matt Hyatt, MRA Consulting Group
Financial Assurance Update
The NSW EPA has released two draft documents regarding Financial Assurances (FA) for activities regulated under the POEO Act 1997 (and Contaminated Land and Radiation Acts).
- The first: Draft Financial Assurance Policy details when the EPA will require FA.
- The second: provides the framework to calculate how much ($).
The NSW EPA, under Part 9.4 of the Protection of the Environment Operations Act 1997, has the ability to manage the financial risks of potential environmental liabilities (spills, abandoned contaminated sites, orphan waste) via a FA for all waste facilities with an environmental protection licence (EPL). The financial assurance is a type of security which allows the EPA to quickly co-ordinate clean-up and recovery operations if the responsible person or company does not implement the required actions in a timely manner, whilst ensuring the polluter pays rather than the taxpayer. This is a sensible component of the regulatory and environmental protection armoury of the NSW Government.
The Draft Policy states that the need for a FA will be evaluated using a risk assessment based on the environmental performance of the responsible person/company listed for the EPL, the estimated cost and extent of potential remediation work and the risk of environmental harm. If the risk assessment identifies that the EPL requires a FA, an independent assessment of the potential costs for the remediation works or actions will need to be sourced by EPL holder.
The standard methodology for estimating the FA for waste management facilities such as waste storage, waste processing (non-thermal), container reconditioning and resource recovery is:
Likely financial assurance amount = Amount of waste the facility is licensed to store * (Unit waste transport cost + disposal cost)
The Draft Guideline details the two-step process to estimate and assess the required financial assurance unique to that EPL’s site and operations:
- Preparation of the cost-estimate – can be completed by responsible person/company holding the EPL or technical specialist; and
- Independent assessment of cost-estimate – can only be completed by a registered company auditor (registered by Australian Securities and Investments Commission).
Note that the Draft Guideline also details the necessary steps for EPL holders to review their FA to ensure it still adequately covers their environmental liabilities as required by the EPA, for major changes in the revised cost estimate an independent assessment will be required.
MRA has prepared a submission on the Draft Policy and Draft Guideline. We believe it represents commonly held views within the industry, but we are very open to comment and feedback:
- MRA understands the need for the Financial Assurances to manage environmental liabilities from the waste management and resource recovery industry.
- FA’s (or their equivalent) are part of the regulatory environment in many western countries.
- MRA understands and appreciates that the NSW EPA will use discretion when assessing the need for a FA and can stage the implementation of the total amount to reduce financial stress (e.g. $50,000 straight away and an additional $50,000, 6 months later).
- In MRA’s view the biggest downside of FA is the negative impact they have on possible future investments and business expansion.
- FA’s must be declared on the Balance Sheet of the Licenced Entity. They are a liability. As such, an FA limits the amount of money that a Licenced Entity can borrow against its assets and income.
- Hence FA’s will lower the borrowing capacity of companies and reduce the future investment potential, at least to the same value of the FA. (Not to mention any additional effect it may have on debt/equity leveraging).
- Most importantly, the effect of the FA on the Balance Sheet liability is the same whether there is a high or low risk of the FA ever being needed. There is no declaration from the EPA as to whether the FA being used is likely or unlikely. All operators are lumped together. Consequently, the lending institution has no measure of how risky the enterprise is, how likely the FA is to be used and therefore the lending institution will assess all FA’s as equally risky. They will therefore value the full amount of the FA as a liability irrespective of whether it has a 100% or 1% likelihood of being used. That is unfair on quality operators.
- Furthermore, the way FA’s are proposed in NSW is that they will only apply to Licenced Facilities. Consequently, they will have a material competitive effect by lowering the borrowing capacity of Licenced Facilities against smaller unlicenced facilities. That is not fair and equal regulation.
- MRA proposes that the EPA consider providing a scoring/risk statement in conjunction with the financial assurance (equivalent to current licence risk assessment process) that will let the lender know the associated risk of the FA being used. The risk statement will provide the lender with context surrounding the risk of the FA as a liability and potentially reduce the impact on borrowing capacity of the licence holder.
- Particularly at this time of the Covid-19 outbreak and the associated impacts on the economy, we need to facilitate rather than hinder investment in recession resistant industries such as waste and recycling.
To save time writing your submission, if you agree with the above statement or would like to provide feedback, get in touch at email@example.com or firstname.lastname@example.org and we can add your name in support of MRA’s submission.
Click this link to view the Draft Policy and Guidelines documents (including presentation slides from the information session) and to complete a survey or find details to make your own submission.
Matt Hyatt is a Senior Environmental Consultant at MRA Consulting Group. His goal is to support businesses operate in an environmentally sustainable manner to achieve their commercial and strategic objectives. If you would like to talk further about the above issue or any other regulatory concerns, please call on 0455 482 544.