SecondSite: Managing assets and liabilities in the gas industry

A portfolio of 620 former gasworks with assorted environmental liabilities is not the stuff of your average property entrepreneur's dreams. However, SecondSite Property - a subsidiary of National Grid Transco - has shown how it is possible to extract value from polluted sites and return much needed land to the marketplace. Statutory pressure in the shape of the new contaminated land regime has helped galvanise the company into action - but along the way, it has worked hard to build capacity and expertise within Britain's land remediation industry.

The waves of privatisation in Britain over the past 20 years have led to a significant increase in levels of environmental investment. The factors vary between sectors, but usually easier access to capital holds the key.

It is difficult to see how the water or waste management sectors would have been able to achieve their investment levels over the past decade had they remained largely public sector operations. The UK's chances of meeting EU environmental targets would be looking somewhat bleaker. Meanwhile, in the electricity sector - albeit after significant delays - the Government has applied regulatory levers to make the privatised industry invest in renewables.

Underlying value
But the case of SecondSite Property shows how privatisation can sometimes bring environmental benefits simply by exposing an asset's underlying value. In common with many nationalised industries, British Gas had vast holdings of surplus land. But it took privatisation and a further eight years of business development for the company to develop a programme of remediation to enable land to be brought back into use

SecondSite Property, previously known as Lattice Property and before that British Gas Properties, was set up in 1994 specifically to apply skills in property and contaminated land management to the legacy from gas manufacturing.

Through a programme of remediation and commercial exploitation, the company has whittled down its original portfolio of around 900 former gasworks to the 620 which remain on its books. Added to these are 180 electricity sites inherited following Transco's merger with National Grid in 2002.

Impressively, SecondSite has disposed of 65-100 properties per year, generating some £85 million in 2002/03 and £107 million in 2001/02.

In total, over its first ten years of operation, the company has embarked on 250 clean-up projects, investing more than £290 million in the process.

Despite the scale of British Gas' property holdings - and its exposure to contaminated land liabilities - there were no property specialists in the group until the early 1990s. The opportunity to create a national property division came in 1994 with the removal of the company's time-honoured regional structure.

Changing the culture
"I found it incredible when I joined British Gas in 1991," says Phil Kirby, who became SecondSite's managing director last year. "There are probably still pockets in Transco that have been doing the same job since they joined at 16 and still think it's the [Gas] Board. But certainly at senior management levels now, we are far more commercial and business-driven than we ever were. It certainly didn't change over night. The step changes have come with each of the demergers and the merger with National Grid."

The gas industry dates back to the 1820s, when gas began to be used in street lighting. By 1930, there were approaching 1,800 gas and coke works. Some produced coal tar feedstock for chemicals manufacture, which sometimes took place on the same site. Others produced coke for use in the iron and steel sector.

Some 1,050 gasworks passed into gas board ownership upon nationalisation in 1949. Over the next two decades, many gasworks were converted to process petroleum by-products rather than coal. The whole portfolio was decommissioned in the 1960s and 1970s with the introduction of natural gas.

Hefty liabilities
At privatisation in 1986, there was no explicit provision in the British Gas accounts for environmental liabilities. The first such provision, made in 1992, totalled some £125 million. At that time, the company began work on a database, drawing together information on land holdings from across the business, along with details of historic activities at each site - although, unfortunately, some records were lost when the company's regional structure was abolished.

Using the emerging database it was possible to improve the liability estimates. The maximum environmental provision - stated in 1995 - was some £450 million.

The latest accounts at Companies House confirm that SecondSite Property Holdings continues to carry provisions for environmental liabilities - although, thanks to the clean-up and disposal programmes, these are now less than half the provision expressed in 1995.

In March 2003, the company reported assets of £438 million, subtracted from which was a £195 million environmental liabilities provision. The accounts explain that the provision, expressed on a discounted basis, covers the statutory decontamination costs of old gas manufacturing sites, and is based on "current legal requirements and existing technologies".

The company's 1995 estimates have proved "very robust", Mr Kirby says. He explains that the liability sum covers site investigation and clean-up work relating to statutory environmental risks. "Water pollution is the main driver of our risk," says Mr Kirby. Contamination risks often relate to potential water pollution, originating from tars or ammoniacal liquors which can leak from underground tanks or pipes.

"Our 'statutory' clean-up goes beyond a simple plaster to stop us being prosecuted; it takes away the principal sources. When we clean up a site it's better than the basic minimum. But we quickly realised that you can waste a lot of money by doing the wrong type of work," Mr Kirby says. Structures cost a lot of money to remove - and it is not always necessary to do so.

Site investigations
Twin factors drive SecondSite's programme: minimising environmental risk and exploiting commercial opportunities. Each creates its own programme of work.

Last year was something of a landmark for the environmental programme. Intrusive investigations at all gas manufacturing sites were completed in March 2003. The programme accelerated around three years ago - coinciding with implementation of the contaminated land regime.

Usually the aim is to identify and remove the principal sources of risk. "It's the tanks and pipelines and how the sites were demolished in the 60s," Mr Kirby says.

Candidly, he admits that site investigations sometimes reveal nasty surprises. "Four or five years ago we had some very high variations on what we thought the cost of cleaning up the site was on an individual basis. I remember one where we found nine tar tanks that we weren't expecting. It turned out the site had been used to store tar from surrounding sites."

SecondSite is also in the middle of characterising the National Grid sites. These include some fuel ash waste tips, and a few sites with lighter oil contamination.

No significant problems with PCB contamination have been identified. However, the issue cannot be ruled out given the extent to which PCBs were used in transformers. In 2001, National Grid disclosed an inventory of 2,248 pieces of equipment containing PCBs (ENDS Report 312, pp 11-12 ).

Tackling statutory risks across SecondSite's portfolio will continue into the longer term, on the basis of site prioritisation and in negotiation with local authority regulators.

So far, no statutory notice under the contaminated land regime has been served for land currently owned by SecondSite - quite an achievement given the number of sites in the portfolio and the number of local authority regulators. The company has at least one former gasworks in some 370 different local authority patches across Britain.

Contaminated land regime
Mr Kirby explains that the company has had to make presentations to numerous local authorities to explain that investigative and/or remedial work are scheduled into its programme.

"We're such an easy target but we're actually dealing with it," he says. "What [local authorities] should be going for are the people who are pretending it doesn't exist and are not doing anything about it."

The company has been at the receiving end of the variable interpretation of the regime across the country. "If we weren't proactive in what we're doing we'd have a lot of blight issues."

"A few councils aren't engaging brain before issuing notices and creating blight," Mr Kirby says. "If you create blight it devalues the land; therefore, there's an even greater gap between cleaning up and obtaining value at the end of the day."

Nonetheless, SecondSite takes pride in having anticipated the onslaught under the new regime, and in convincing the parent group to support its strategy. "We bit the bullet; I think if we hadn't we would be having an awful lot more problems than we presently have. The fact that we made a provision and recognised there was a problem has stood us in good stead."

Commercial programme
A separate work stream is created through SecondSite's sales programme, under which marketable sites are prepared for disposal at the rate of 60 or more per year. Investment under this programme is running at £30 million per year.

The sales programme probably has only another 5-7 years to run, says Mr Kirby. After that, the pace of redevelopment will slow markedly, as projects will only become viable when a new buyer emerges or some other change in market conditions takes place.

Shifts in the property market have made residential projects particularly attractive at present, and residential planning consents are of high value. Retail consents, once the centrepiece of gas industry redevelopment projects, remain desirable but are more difficult to come by.

But what will happen to sites for which redevelopment is not presently viable? "The sensible thing," says Mr Kirby, "is you spend the money when it's needed to be spent. You've got a provision and you keep it there. We've still got to generate the cash to pay for it."

The Government's strategies on brownfield land and housing are, of course, important drivers for the company's sales programme. Forthcoming opportunities include three or four major gasworks sites in the Thames Gateway and two in London's Lee Valley, the proposed site of the 2012 Olympics.

The picture mirrors the company's experience in the early 1990s when it was able to capitalise on its Greenwich site, which it sold to English Partnerships having appointed Richard Rogers to help with the bid for the site which was to become the Millennium Dome.

Consultancy expertise
Lack of capacity in the contaminated land industry dogged progress on UK land remediation for many years. The picture today has changed markedly over the past decade - and Phil Kirby has been involved in numerous initiatives to help the sector raise its game.

"Quite frankly the consultants weren't up to it," Mr Kirby says. "We've done a lot of training and information sharing because quite frankly it has been in our interests."

"It's trying to pull all of the consultancy market up to a level where the purchasers and the developers of these sites have confidence in them."

Phil Kirby was a member of the Government's Urban Task Force, chaired by Lord Rogers, which reported in 1999 (ENDS Report 293, p 8 ). This led to work on developing a standardised land condition record (LCR) for remediation projects.

The Task Force also recommended a new regulatory system for land remediation schemes to avoid the need for waste management and a range of other licences. A worked-up proposal for remediation permits is anticipated shortly from the Environment Department.

The LCR documentation, launched in 2000 (ENDS Report 311, p 5 ), is now routinely applied by SecondSite.

"We had a really stupid situation on one site," recalls Mr Kirby. "We had our own consultant, the developer had his own consultant and lawyer and there were three tenants and a funder, each with their own consultants and lawyers. There was a problem on the site caused by the fact that the information wasn't provided in the same form. It delayed our income on the site by around 12 months. It all came down to the fact that consultants were not presenting information in a consistent manner."

A related initiative is a scheme to accredit specialists in land condition (SILCs), the first of whom received their certificates in 2001 (ENDS Report 324, p 10 ). The scheme, administered by the Institute of Environmental Management and Assessment, now boasts 52 registered SILCs.

Thanks to these initiatives, transactions are working more smoothly, Mr Kirby says. "We're not experiencing as many in-depth arguments as we were. I think it's helping. It's intended that when purchasers commission their own studies they are dealing with data that are transparent."

Disclosure
The sheer scale of SecondSite's portfolio, and the need to maintain its reputation in the property market, makes it essential for the company to be up-front about the risks associated with any particular site. But do the same factors apply to other land owners?

Mr Kirby says that lessons could be drawn by owners of contaminated sites in other sectors - and the key is to look at land as an asset rather than a liability. That said, SecondSite is blessed with a portfolio of well-located urban sites.

Until the creation of its property division, British Gas tended to avoid public debate on contaminated land - with some embarrassing consequences.

"In 1994, when I was given responsibility for all the contaminated land in the group, a large folder arrived on the table regarding a TV investigation," Mr Kirby recalls. "The folder contained a whole series of letters, without replies, from Friends of the Earth, the local community, etc, etc."

"The company elected not to appear on the programme. That taught us a big lesson."

Nowadays, SecondSite employs sophisticated techniques to ensure that information is available when local stakeholders need it. "We do letter drops at sites where work is planned, even if it's remediation work with no redevelopment activity."

The company undertakes a site visit and identifies sensitive neighbours well in advance of any work. It drafts letters to all those affected giving advance notice, and one-to-one meetings with key neighbours are arranged.

"People have a number to call if they have any questions," Mr Kirby says. "It was a valuable lesson early on. I'm just amazed at the number of letters we receive from the public thanking us."

"If you don't do it you're in trouble. Because of the health and safety rules you turn up at the site in a mask and protective white suit and somebody's leaning over a fence asking 'why are you doing that'."

On-site treatment
An important issue for SecondSite is the massive tonnage of contaminated materials it sends to landfill. Currently, the company consigns some 650,000 tonnes of special waste each year.

Nonetheless, it is also processing large quantities of contaminated soils on-site, so minimising haulage and landfill costs. In 2003, some 20% of the company's hazardous waste went for on-site treatment - mainly by soil washing and bioremediation.

SecondSite has four further soil washing projects planned for this year - but Mr Kirby is anxious to point out that this option still raises a waste disposal issue. "Even with soil washing, you're left with a concentrated waste, and, under the new waste acceptance criteria, you might have to bulk it to treat it before you can dispose of it."

Similar issues apply with respect to bioremediation schemes - a few of which are planned by SecondSite for 2004. "Bioremediation is fine but it does not deal with certain types of soil and it only deals with organic contaminants."

A serious constraint with both soil washing and bioremediation is the land footprint required to accommodate the processing activities, making them unsuitable for some small sites. Moreover, soil washing won't work in clay soils and bioremediation - though generally effective for lighter end hydrocarbons - won't work where contaminants occur in soils as large concentrations.

For contaminants such as polycyclic aromatic hydrocarbons (PAHs) or which bioremediation is not reliable, the preferred solution at many sites remains "dig and dump". Guideline levels for one PAH, benzo[a]pyrene, derived under the new CLEA risk assessment model, have had the effect of increasing the amount of soil needing treatment or disposal.

Landfill Directive
The new controls on hazardous waste disposal under the EU landfill Directive are of immense importance to companies in the land remediation sector.

Only a handful of hazardous waste landfills are expected to remain in operation and the waste industry remains coy about plans for investing in so-called "mono-cells" for stabilised hazardous waste at other landfills (ENDS Report 348, pp 14-15 ). Prices for the disposal of contaminated soils are expected to triple.

The proportion of contaminated soils treated on site will "almost certainly go up", Mr Kirby says.

A particular problem for gasworks sites is contamination with tars - acceptance of which will be severely restricted under the new landfill acceptance criteria. Alternative strategies for these materials include low-temperature thermal desorption.

SecondSite will be running a whole-site trial with a thermal desorption unit later this year to establish the efficiencies and costs. The company also visited similar equipment operated by Niagara Mohawk, a National Grid Transco subsidiary in the USA.

Other options for tar contamination are to leave the material on site or to apply stabilisation techniques. Both carry regulatory or technical problems. Leaving materials on site is often deemed by the Environment Agency to be a "landfill" operation. This could mean that the landfill Directive waste acceptance criteria kick in, closing off this option as well.

Last October, Lord Rogers warned the Office of the Deputy Prime Minister about the Directive's impacts on brownfield regeneration (ENDS Report 345, pp 3-4 ). The Government is presently considering how to respond, but it has only limited room for manoeuvre under EU law.

Mr Kirby believes the new remediation permitting regime will help relieve some of the pressure. Treatment processes that are not viable on a small site could operate at a centralised site, after which the treated soil might be returned to the original site without the need for waste management licences. Many of SecondSite's remaining sites are fairly small - with 85% of sites covering only 20% of the land area.

"The problem with waste legislation," says Mr Kirby, "is it's aimed at the current waste stream, not the historic one. We've got this waste, it's in the ground, it's got to be dealt with but it's tied up with the legislation and its interpretation. That's what we're trying to break through."

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