Financial Provision Principles
To be effective, financial provision must be:
- secure for the duration of an operator’s activities, and, in the event of an operator’s insolvency or dissolution, funds must be available to discharge the environmental liabilities;
- sufficient to cover all of the environmental liabilities; and
- available to the relevant person, such as the regulator, to discharge the environmental liabilities when required.
If these conditions are not satisfied, the financial provision may fail. It is essential that the financial provision is established on a sound economic and legal basis in the first place and maintained and monitored thereafter.
Defining the appropriate amount of provision is crucial. If financial provision is secure and available but in an inadequate amount, then the public purse may be required to meet the shortfall, and the process will not be fully successful. It may be possible to point to the standard works and associated costs necessary to manage and mitigate foreseen liabilities, but the level of financial provisions needed for unforeseen liabilities is more difficult to determine.
The timing of the availability of the provision is also important. For facilities that are subject to progressive closure, financial provision needs to reflect the partial closure works as well as the final stage of closure, and the period of aftercare. The duration of the aftercare period needs to be determined, with landfill sites typically being considered to require aftercare financial provisions for at least 30 years. In other circumstances – for example, oil and gas wells – the liability (e.g. potential for leakage) may extend well beyond the lifetime of the operation and decommissioning of the well.
In terms of the legal certainty of the financial provision, one of the most important factors is ensuring that the financial provision is protected in the event of operator insolvency or dissolution, as this is often when it is required.
Financial provision is not a panacea and the protection afforded by financial provision may be limited, in particular in the case of illegal activities. Certain illegal activities (e.g. dumping of waste) occur completely outside of the permitting and legal systems under which financial provisions are established. Illegal activities may also compromise the sufficiency and legal security of financial provisions even when they are in place. An example is the abandonment of a waste processing site where waste is stockpiled in excess of the permit limits; the financial provision would not be sufficient if it was calculated based on the permit limits. Illegal activities may also invalidate financial provisions from a legal perspective due to exclusion clauses for illegal acts. There is some discussion on the page other approaches, which is relevant to enforcement of illegal activities.