Agency unveils policy on financial cover for landfills

A new policy on financial provision for landfills was unveiled at the Environment Agency's board meeting in late November. The new position follows legal judgments which have undermined the existing regime at a time when the Agency is gearing up to process 1,000 applications for the new generation of landfill permits. A key element of the new policy is that a fund supported by landfill tax revenue will be required to deal with some abandoned sites.

The existing regime on financial provision for waste sites has been undermined by a series of court judgments establishing that a waste management licence is "onerous property" which may be discarded by a liquidator.

The Agency is also anticipating that, in these circumstances, creditors - rather than the Agency - will have first claim on the financial provisions.

In November, a High Court ruling to clarify the position was deferred. The ruling will say whether or not the Agency is entitled to a provision of £375,000 which had been set aside by the operator of Manywells landfill in West Yorkshire which was abandoned in 2001 (ENDS Reports 341, p 30 , and 324, p 16 ).

The Agency has also received legal advice that, while a licence is in force, it has only limited powers to undertake emergency works - and that it should attempt to recover such costs from the operator rather than accessing financial provisions itself. In essence, this means that the provisions are for the operator's use, not the Agency's.

By contrast, the Agency had once assumed that a site licence would remain in force in the event of a company going out of business, and that the regulator would have an obligation to carry out works to protect the environment. It was also assumed that financial provision made by operators would be available to the Agency.

The system stems from the Environmental Protection Act 1990, under which an operator of a waste site is deemed not to be "fit and proper" if he has not made or has no intention of making financial provision "adequate to discharge the obligations arising from the licence."

Under Government guidance, this requirement was interpreted as meaning that operators of sites licensed after the new regime took effect in 1994 should set aside funds in an escrow account or bond. A policy change last year removed this requirement for non-landfill sites, provisions for which are now being returned to operators (ENDS Report 333, p 39 ).

In the case of landfill sites, meanwhile, the sums set aside do not begin to reflect the liabilities. A recent study by AEA Technology estimated that liabilities incurred between 1994 and 2002 are in the range £1.95-£3.56 billion. This compares with the £165 million that had been set aside by April 2002 (ENDS Report 345, pp 16-17 ).

The greatest risks of insolvency lie with smaller operators. AEA found that small operators account for £195-228 million of aftercare liabilities incurred since 1994, but barely one-tenth are covered by financial provision. One factor behind the shortfall is that the regime has not been applied retrospectively, even where existing licences permit ongoing disposal activities.

The statutory position is about to change thanks to the EU landfill Directive and the pollution prevention and control regime. Operators of nearly 1,000 landfills are applying for new permits over the next three years. It is a statutory requirement that they must make provision to cover aftercare liabilities before commencing operations under the new permit.

The Agency's new policy, presented to its board in November, reflects the wording of the landfill Directive - which requires operators to make adequate provisions "by way of a financial security or any other equivalent", and that the provisions should ensure that the obligations arising under the permit are discharged.

The Agency interprets this as meaning that the financial provision should be "stable" and "accessible to the operator". The new policy will therefore reflect the necessity for the operator, rather than the Agency, to have access to funds.

In the board paper, the Agency says: "We believe that the purpose of financial provision is to ensure that adequate funding is available for an operator to meet all the aftercare requirements of a landfill once it has ceased to accept waste and until it has stabilised and the permit can be surrendered."

It puts the sums involved at around £1-£2 million per site or between £0.50 and £1.00 per tonne of waste deposited. The level of provision is to be calculated on the basis of obligations arising solely from future deposits. Calculations are to be made over a 60-year aftercare period.

The paper makes it clear that provision in company accounts will not be an acceptable mechanism on its own, nor would mechanisms that pay money in favour of the Agency.

The existing escrow arrangements will have to be modified to allow operators access to funds at all points in the landfill's life, subject to Agency controls. It will be in the form of a "closed purpose" trust. Similarly, bonds and insurance agreements currently worded to pay out to the Agency would have to be modified to pay out to the operator.

The Agency has already drafted a revised escrow agreement and is now ready to discuss agreements for revised bonds or insurance products. It does not believe that the changes need cause delay to determination of the first tranche of PPC permit applications, received in June (ENDS Report 343, pp 17-18 ).

Operators of sites passing into the PPC regime will have any existing agreements on financial provision cancelled. They may, therefore, be in for an unanticipated lump sum. The new provisions will be in respect of future waste deposits only.

However, agreements for landfills which close under a waste management licence will be retained - but modified to name the operator as the beneficiary.

The Agency believes that, because the landfill Directive is more explicit than the 1990 Act, it will no longer be possible for liquidators to disclaim a permit as onerous property. "However, because the law does not deal directly with this interpretation, we may have to prove our position in court. It would be far better to clarify the current laws."

It has asked the Government to provide greater clarity, so as to remove the risk that funding from financial provision will continue to be unavailable at abandoned sites.

Another issue requiring Government intervention is how to tackle abandoned landfills for which inadequate financial provision is in place. Around 20 landfill operators entered administration over the past five years. The Agency anticipates that, because of the investment required in upgrading sites, there will be a higher risk of insolvency under the PPC regime.

The Agency has been exploring the options with the industry and the Government over the past 18 months. Efforts to find a solution which does not involve changes to legislation have been unsuccessful.

The Agency is instead calling on the Government to establish a body to take over the ongoing management of abandoned sites. "We believe it is not appropriate for the Agency to take over the operation of abandoned landfills and their permits as this would conflict with our role as a regulator."

It proposes an industry-wide insolvency guarantee fund, with contributions collected through the landfill tax or an alternative levy. It argues that by maintaining site-specific funds the new policy will not create any new incentive for unscrupulous operators to enter insolvency.

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