Row on financial cover for waste sites deepens

A row over the requirement to make financial provision for the long-term liabilities of waste management sites looks set to intensify. The Environment Agency, already threatened with legal action by the waste industry, is now planning to extend the requirement to hundreds of older waste sites that were not expected to fall under the regime - a move which will rapidly tie up large sums of capital.

The requirement in the Environmental Protection Act 1990 for holders of waste management licence to make "adequate" financial provision was developed with support from the waste industry. The key objective was to prevent "men of straw" from operating waste facilities and subsequently walking away from their environmental liabilities.

The biggest liabilities arise at landfills from decades of post-closure monitoring and control of gas and leachate. In addition, cover must be provided for any licence conditions requiring remedial action in the event of an incident, such as the failure of a liner system.

The 1990 Act provides that a person who has "no intention of making or is in no position to make financial provision adequate to discharge licence obligations" should not be considered "fit and proper" to hold a licence. The Government's view of what is "adequate" was set out in statutory guidance in Waste Management Paper 4, issued in 1994 when the new licensing regime was implemented.

When the legislation went through Parliament, the waste industry believed that balance sheet provision - quantifying a company's aftercare liabilities in its audited accounts - would generally be "adequate". It assumed that tougher requirements for independently held post-closure funds would be imposed only on companies with an inadequate capital base.

Larger firms hoped that the requirements would squeeze smaller operators out of the industry. Removing competition from small landfill businesses would, it was argued, raise both standards and profit margins.

However, the industry reacted to the 1994 guidance with dismay. It requires landfill operators to set up a "specific mechanism" to cover their liabilities. The Environment Agency has since interpreted this to mean an independently held fund - such as an escrow account, renewable bond or trust - for all landfills, irrespective of the financial strength of the company. The industry argues that the Agency is acting beyond its statutory powers and that large capital sums will be tied up unnecessarily.

To date, the row has only concerned new or extended sites. But the Agency is now proposing that pre-1994 sites licensed under the Control of Pollution Act (CoPA) 1974 should be brought into line. Such licences automatically became waste management licences under the 1990 Act when the new regime was implemented - but under the 1994 guidance the licence holders were automatically deemed "fit and proper".

"The Agency has said that whatever applies on financial provisions should apply to all sites," Dr Ian White, who leads the Agency's work on "fit and proper persons", told ENDS. "There will be a policy that from a certain date the rules on financial provisions will apply to existing sites."

  • Market distortions:
    At the heart of the Agency's policy difficulties on financial provisions is pressure to avoid distorting competition in the waste industry in favour of big firms. In particular, the Department of Trade and Industry is opposed to policies that would impact unduly on smaller businesses. Applying different rules depending on the financial strength of a company would give advantages to big firms.

    However, having selected financial provision options which will tie up large capital funds, the Agency has realised that it is offering competitive advantages to operators of pre-1994 sites. The need to maintain fair competition is therefore one of its justifications for requiring financial provisions from operators of older sites. Such a levelling of the playing-field would give operators one less reason to object to the regime - although they will remain opposed to typing up capital today to pay for costs to be incurred in the future.

    The new policy on existing sites is touched on in internal guidance to be issued by the Agency in July, but full details have yet to be ironed out. Dr White acknowledged it would "severely distort" competition to require full financial provision for a landfill with only a small remaining void. He suggested that the provision could be scaled depending on the remaining void: a site with 50% of its void remaining would only be required to make half the normal provision.

    The Agency's new guidance, a rewrite of an interim statement issued last year, reiterates the position that escrow accounts, renewable bonds or trusts are the "preferred options" and gives no ground to the industry's complaints.

  • Powers for existing sites: One question which the 1994 guidance did not answer directly is whether the Agency has powers to require financial provisions for older sites. It says that "fit and proper" status may be removed from the holder of a licence for a pre-1994 site if he was subsequently convicted of a "relevant offence" or if management of the site transferred to a different person - but on financial provision, the third leg of the "fit and proper" test, it is silent.

    The Agency justifies its proposals on the basis that section 77(2) of the 1990 Act enables it to vary existing site licences, while section 37(2) obliges it to modify licence conditions "for the purpose of ensuring that the activities...do not cause pollution."

  • Industry views:
    The Agency's proposals on pre-1994 sites will inflame its row with the Environmental Services Association (ESA), which represents waste management businesses. The ESA says it has obtained a legal opinion that the Agency is overstepping its powers by requiring all operators to make provisions through escrow accounts or other independently held funds. The ESA has been lobbying intensively on the issue, and is drawing up plans to fund a test case in the courts - although Peter Neill, its Chief Executive, says that this is an "option of last resort".

    The ESA has also written to the Department of the Environment (DoE) proposing a revision of Waste Management Paper 4 to leave greater discretion to the Agency to determine the provisions required of a particular operator.

    Mr Neill added that tying up capital in escrow accounts would reduce the industry's ability to invest in alternatives to landfill such as recycling and waste treatment infrastructure. "If you want the industry to move waste up the hierarchy, where's the investment going to come from?" he asked.

    The Agency's position is that it needs secure funding to cover the possibility of a company becoming insolvent before a certificate of completion for a landfill is issued - which in some cases could be more than a hundred years after closure. "The Agency has obtained counsel's opinion that we are perfectly entitled to impose the requirements," Dr White said. "Any revision of Waste Management Paper 4 would take a considerable amount of time, and it's the Agency's view that there's nothing wrong with the financial provisions requirements."

  • Mutual funds:
    Dr White believes that some sort of mutual fund - permitted under the DoE guidance - offers the best way forward. However, plans for a mutual scheme called Newco - which would have taken full responsibility for sites after closure - failed in the early 1990s because the DoE decided that it might not qualify as "fit and proper" to take on landfill licences after closure.

    Agreeing membership criteria and conditions for mutual funds will not be straightforward. Firms operating to high standards will be reluctant to subsidise those that are not.

    However, ideas are now circulating in the industry for a mutual fund which would step in only where operators failed to meet licence obligations - such as if they became insolvent. The attraction of such a scheme is that potentially much less money would have to be set aside - assuming that the Agency accepts that insolvency will be the exception rather than the rule over the next few decades for waste firms joining the scheme. And once again, agreeing the membership rules will prove tricky.

    Another idea being discussed in the industry is to press for modifications of the landfill tax regime. Part of the tax revenues could be set aside in a fund which would pay up when licence holders failed to meet their obligations. However, even if the Treasury could be persuaded to renounce tax revenue, it would be difficult to agree how large the fund would need to be and how it should be regulated and managed. And if all waste management sites were covered by the fund, the regime would fail to weed out firms which had no intention of paying for their long-term liabilities.

  • Landfill Directive:
    While legal action or lobbying by the waste industry may succeed in changing UK policy on financial provisions, new legislation may be round the corner. The requirements on financial provisions in the latest draft of the EC Directive on landfills go further than the 1990 Act, in that the Directive states how the provision should be made. It demands that a "security or any other equivalent (eg bank guarantee)" must be kept to fulfil aftercare obligations.

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