Financial Provisions for long-term Environmental LiabilityCase study from Norway

Tonje JohnsenSenior legal adviser, Section for Legal Affairs

Case study: Financial Provisions for landfills of waste

Main themes

Relevant leglislation

Challenges facing the Agency

The Agency`s administrative practice

Enforcement

Legal framework in Norway

The main purpose of the procedures in the Norwegian security, insolvency and bankruptcy law:•Distribution of assets to all creditors by way of dividends

The legal position of secured creditors in bankruptcy:• As a main rule, secured creditors are unaffected by bankruptcy

Legal framework in Norway - continued

Abandonment of assets of no value to the estate:

• Landfill of waste and other waste sites, hazardous waste in particular, is a text book example of assets likely to be abandoned

Directive 99/31/EC on the landfill of waste

Art. 8(a) (iv): “the competent authority does not issue a landfill permit

unless it is satisfied that: (iv) adequate provisions, by way of a financial security or any other equivalent, on the basis of modalities to be decided by Member States, has been or will be made by the applicant prior to the commencement of disposal operations to ensure that the obligations (including after-care provisions) arising under the permit (…) are discharged and that the closure procedures required by Article 13 are followed. This security or its equivalent shall be kept as long as required by maintenance and after-care operation of the site in accordance with Article 13 (d).”

Directive 99/31/EC on the landfill of waste- continuedThe essential points in article 8 (a) (iv): adequate provisions, by way of financial security or any

other equivalent

ensure that the obligations (including after-care provisions) arising under the permit (…) are discharged and that the closure procedures required by Article 13 are followed.

kept as long as required by maintenance and after-care operation of the site in accordance with Article 13 (d)

Directive 99/31/EC on the landfill of waste- continuedArt 10:«Member States shall take measures to ensure that all of the costs involved in the setting ut and operation of a landfill site, including as far as possible the cost of the financial security…, and the estimated costs of the closure and after-care of the site… shall be covered by the price to be charged by the operator for the disposal of any type of waste in that site..»

Directive 2009/31/EC : Guidance document 4

Guidance document 4 from 2011

Broader analysis of the challenges and risks

Relevant for financial provisions for other long term environmental liabilities

Directive 99/31/EC on the landfill of waste - The challenge: long period of time

Closure

Operational phase Aftercare (30 years)

5 10 15 20 Years25 30 35 40 45 50

Challenges with securing long-term liabilities

Normal duration of what is commercially available in the bank market does not fit the long period of time

The value of security may deteriorate over time

Acceptable Financial Provisions are expensive

Different administrative practice in Europe - difficult to get industry to accept requirements

The Agency`s administrative practice :

Essential criteriaFinancial provisions must cover and be certain for the entire period – no need to be renewed or replaced

Administratively manageable in this period

Ensure security in case of bankrupcy and claims from third parties (perfection of security)

Easy and immediate access to funds

Which Financial Provisions are acceptable?

Acceptable forms of security

Account pledges in respect of blocked bank deposits

On demand bank guarantees

Parent guarantees in combination with one of the above forms of security for a limited period if parent has high rating

Other financial provisions must be examined case by case

Unacceptable forms of security

Accounting reservesEarmarked fundsBank guarantees where the bank can invoke the same defences as the company

Parent guaranteesSecurity over real estate and securities Insurances

On-demand guarantees

The Agency has a template for on-demand guarantees that the operators have to use – The Agency is the beneficiary

Banks as guarantors

Automatic renewals and notice to the beneficiary before expiry

On-demand guarantees - continued

The risk of early expiry is addressed in following clause:

• If the Guarantee has been terminated in accordance with Clause 6 above, the Beneficiary may present a demand under the Guarantee for the full Guaranteed Amount, irrespective of whether the Company fulfills its obligations. The Beneficiary may retain the Guaranteed Amount paid by the Guarantor as security for future obligations for as long as the Company shall provide security to the Beneficiary under the terms of the Permit.

Account Pledges

The Agency has a template for account pledges that the operators have to use – The Agency is the mortgage holder

Flexible rules for establishing security over bank accounts in Norway

Perfection of security: notice to the bank

The Agency only accept accounts held with Norwegian banks

The Agency`s administrative practice- The advantage:

Prevents the need for replacement of the financial provision during the long period of time

Scope of the Agency`s administrative practice

Directive on the landfill of waste

Directive on the management of waste from extractive industries

Treatment and storage facilities for hazardous waste

A problem case – parent company guarantee Landfill of waste – international metals company

The company proposal: a parent company guarantee

and a commitment to establish an on demand bank guarantee or an account pledges if the parent comany’s net debt ratio deteriorates to 90 %

The Agency did not accept the suggestion

The Ministry of Climate and Environment upheld the decision

Enforcement of Financial Provisions

On-demand guarantees and Account Pledges will be enforceable when:• Breach of terms in the permit• Expiry of on demand bank guarantees• Bankruptcy etc

In bankruptcy, on-demand bank guarantees and account pledges will not be affected by «freeze periods»

Enforcement of Financial Provisions- Sandnessjøen Gjenvinning AS

Foto: Miljødirektoratet v/ Ida Marie Evensen

Enforcing Financial Provisions- conclusions

On demand bank guarantee and account pledges enable:

Easy and immediate access to funds

Clear conditions with the bank

Fast follow-up from the Agency

Summing up

To ensure the implementation of the polluter pays principle and to protect the taxpayers in cases of long-term environmental liabilities the competent authorities have to have a strict practice

The Agency recommend using experts on banking and finance

The Agency accepts two main types of financial provisions

The practice is largely accepted by the industry

The practice ensures easy and immediate access to funds