4.5. FACTSHEET-SELF PROVISION

Self-provision is financial provision by the operator itself.

Self-provision is the weakest method of financial provision. This may only amount to ensuring the operator plans for environmental liabilities, represents environmental liabilities in financial statements and/or provides a written commitment. Although it may be supported by financial criteria and checks, self-provision still offers little or no protection in the event of operator insolvency or dissolution. If the regulator becomes aware of the deteriorating financial strength of the operator and requires it to deposit funds or assets to provide for environmental liabilities, then this may be challenged under domestic insolvency or winding up law as a ‘preference’.

The interpretation, verification, and monitoring of the financial test is time consuming and expensive, and also requires financial expertise. It may be restricted to public bodies/local government operators where the prospect of the operator ceasing to exist is remote and the liability is a public one in any case.

Ultimately there may be little or nothing that can be done if the operator encounters financial difficulties, so the critical point in considering self-provision is its suitability and acceptability in the first instance, in particular beyond public bodies/local government operators.

ADVANTAGES

DISADVANTAGES

✓ Little or no cost to the operator and does not oblige the operator to set aside funds, so does not tie up capital.

✓ Encourages the operator to plan for environmental liabilities and represent them in financial statements

X The overriding risk is that the self-provision becomes devalued or worthless if the financial strength of the operator declines, the worst case being insolvency.

Important considerations – financial institution guarantee

Basic considerations	Whether the financial provision provides for the estimated environmental liability. Whether the financial provision is payable to the regulator on demand. Whether the financial provision provides protection against insolvency or dissolution of the operator and is protected from inflation. The operator must have sufficient financial strength for the amount of the potential liability. Whether the operator is a public body or not.
Documentation	The following documents are generally required: Legally binding financial provision document, details of the amount of cover and the cost profile, evidence of authorisation of the institution or parent to provide the financial provision, evidence of any supplementary cover required to cover gaps in the primary cover, evidence of financial strength of the operator based on audited accounts prepared according to international accounting standards, evidence of the provision and potentially a written guarantee to maintain the provision. Template documents can help ensure the key aspects are covered
Documentation specification	Generally, the documents will specify the triggering event, that the regulator may make a demand in the case of a triggering event or insolvency or winding up, requirements in relation to reporting, notifications of cancellation/expiration and replacement and inflationary adjustment, specification that the regulator may require provision of alternative financial provision upon cancellation/expiration, ongoing requirement to meet specified financial criteria, financial triggers for replacement with a stronger financial provision.
Reporting and monitoring	This will include triggering events, developments that affect ability to ensure provision, withdrawals or demands, performance of the institution/fund/asset, environmental compliance, the level of the liability against the value of the financial provision, (for foreseen liabilities) restoration progress reports, (annual minimum) audited financial statements and reporting on the level of liability and notification if the operator is likely to no longer meet specified financial criteria.
Enforcement	A demand will be made on the financial provision if the triggering event arises. The regulator may need to take enforcement action in the event of declining financial health, value or performance or where the required reporting is not provided. The regulator will need to make sure that the financial provision is acceptable or require a replacement provision.