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Who should read this article?
Holders of environment protection licences, people whose activities may have contaminated land and owners of actual or potentially contaminated land in NSW.
In March 2020 the NSW EPA released its Draft Financial Assurance Policy (Policy) and Draft Guideline on Estimating Financial Assurances: Independent Assessment of Costs (Guideline) for public consultation, which proposes new measures on when the NSW EPA will require financial assurances and how financial assurances are to be estimated under the Protection of the Environment Operations Act 1997 (NSW) (POEO Act), the Contaminated Land Management Act 1997 (NSW) (CLM Act) and the Radiation Control Act 1990 (NSW) (RC Act) (collectively, the legislative regimes).
Under the current legislative regimes, a polluter is required to pay for any remediation of pollution or contamination of land arising from that person or company’s activities, including any contamination from historical activities.
At its core, the draft Policy and Guideline aims to increase the effectiveness of the ‘polluter pays’ principle so that those responsible for pollution or contamination actually pay the costs of clean-up or remediation. Although this already occurs under the current legislative regimes, the draft Guideline and Policy proposes to reform the current financial security measures because liabilities associated with cleaning up pollution and remediation have in some cases fallen to the NSW Government and community in circumstances where the polluter is unable (or unwilling) to pay.
Importantly, the NSW EPA already has powers under its existing legislation to require a financial assurance to guarantee funding for potential environmental liabilities. The NSW EPA can require an independent cost assessment to provide confidence that the costs are a reasonable estimate for cleaning up or remediating a site should the NSW EPA have to step in and manage these processes. The Policy and Guideline are intended to provide greater certainty and transparency for stakeholders as to the application of the financial assurance provisions in the relevant legislative regimes.
This Policy explains how the NSW EPA proposes to impose financial assurances to secure or guarantee funding for certain actions required by a licence or management order under the legislative regimes.
The NSW EPA defines the term ‘financial assurance’ as ‘a type of security provided by the responsible person or company. It provides the NSW EPA with access to money to cover the costs of carrying out actions (including the likely costs and expenses of the NSW EPA in directing and supervising the carrying out of actions) where the responsible person or company fails to carry them out.’ It is usually the following:
The Policy applies if you:
For holders of an EPL, the purpose of financial assurance is to secure funding for or towards specific works or programs required by the licence, for example remediation work, pollution reduction programs or ongoing monitoring post closure.
Under the Policy, the threshold for a financial assurance is where the action is considered medium or high risk, though the NSW EPA may nonetheless decide to impose a financial assurance for low risk activity depending on the circumstances. It also depends on what phase the company life cycle is in. For example, during pre-operation and planning phase, a financial assurance may be required where there is a planned approach to address site closure and transport and disposal of waste. During the closure and rehabilitation phase, the complete rehabilitation of a major industrial site (including an on-site location of a containment cell regulated by the NSW EPA) may also require a financial assurance. Some high risk activities include sites where historic contamination (including groundwater contamination) is known and requires ongoing treatment, toxic chemicals have been stored on the site, sensitive receptors have been impacted or the activity gives rise to human health risks (eg livestock processing) and sites where significant volumes of waste have been stored on the site.
The new Policy would have the NSW EPA retain the financial assurance until the required actions for remediation are completed. Should you not complete the required actions, the NSW EPA may carry out those actions itself and pay for it using the financial assurance.
Importantly, the Policy states that if the financial assurance is intended for an action required by an environment protection licence, the NSW EPA must also consider whether you have already provided a financial assurance to another public authority for carrying out substantially the same action. Whilst the Policy clearly states that it is not intended to duplicate any other financial security already provided to the NSW Government, for example a rehabilitation security deposit for a mine, in practice there may be difficulties in assessing the extent of any overlap and whether rehabilitation under an EPL is already covered by a security deposit under other legislation. Under the various Acts, even if environmental insurance is already held (which can be required as a condition of an EPL under the POEO Act), the NSW EPA may nonetheless decide that financial assurance is required to cover both the known and unknown environmental liabilities at the site.
The Guideline covers the calculation of the costs of carrying out the action that the financial assurance is required for, and the independent assessment of, ‘cost estimates’. A ‘cost estimate’ is defined as the reasonable estimate of the total likely costs and expenses that may be incurred in carrying out the actions required by or under the CLM Act, the POEO Act or the RC Act. It does not apply in other situations where potential liabilities are being calculated for a different purpose. The Guideline addresses:
An independent assessment of costs is required when the NSW EPA requires a financial assurance to secure or guarantee funding towards your obligations under your licence or management order. An initial costs estimate is to be completed by the responsible person/company or a technical specialist, and an independent assessment (in the form of an audit) is then required to be conducted by a registered company auditor.
Where a project may extend for many years or where there are major variations to the scope of actions, the NSW EPA may also require a review and re-assessment of the cost estimate to confirm the continuing accuracy of the costs of certain remedial actions.
The scope of the cost estimate is for the actions specified in the condition requiring financial assurance in a licence or management order, which includes the estimated amounts of money needed for the pollution reduction of remediation actions.
However, the scope of costs does not include:
The methodology of the calculation of costs must include a ‘detailed quantified schedule of items’, though it is important to note that it is not specified. Nonetheless, it must include the following items, using the best data available at the time (able to be referenced and verified and taking into account inflation):
Importantly, the cost estimate must include a contingency provision for the purpose of reflecting the risks, including unplanned or unforeseeable conditions such as adverse weather events, materials or supply shortages, or changes due to incomplete design information, remediation failure or regulatory requirements. Whatever the final numbers are, the contingency rate must be documented and the rationale for the various numbers clearly explained using industry contingency estimation frameworks.
The cost estimate must be provided to the NSW EPA and must be accompanied by the supporting documents and auditor’s independent assessment report on the cost assessment.
As for the independent assessment of costs, the following must be done in order to satisfy the Guideline:
The cost estimate may be reviewed either by the time period stipulated in the licence condition itself, or as part of a five yearly licence review. When revising, you must provide a detailed breakdown of each expense (and income) category showing percentage movements since the previous estimate. If the cost estimate is considered to be a ‘major change’ as defined in the Guideline or where the NSW EPA directs, there must be an audit of the revised cost estimate.
We recommend that holders of EPLs, people whose activities may have contaminated land or owners of actual or potentially contaminated land familiarise themselves with the Policy and Guideline, especially the checklists contained in the Guideline and detailed assessment of the various risk categories in the Policy, to see how it will affect business moving forward. Submissions to this consultation are due to close at 5pm on Tuesday, 14 April 2020. The introduction of the Policy and Guideline by the NSW EPA is likely to signal a desire by the NSW EPA to impose more financial assurance requirements going forward, which will have significant financial consequences for many business operators and owners of land.
Please contact our Environment and Planning Team if you would like any further information or would like assistance in preparing a submission.
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