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Financial Provisions for long-term Environmental LiabilityCase study from Norway
Tonje JohnsenSenior legal adviser, Section for Legal Affairs
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
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