What has happened?
The NSW Environment Protection Authority (EPA) has recently released two draft documents for public comment, being the:
- draft Financial Assurance Policy (Draft Policy); and
- draft Guideline on Estimating Financial Assurances (Draft Guideline)
The public consultation period is scheduled to close on 14 April 2020. Copies of the Draft Policy and Draft Guideline, and information on how to make a submission, are available here.
Who will the Draft Policy and Draft Guideline affect?
The Draft Policy and Draft Guideline have the potential to affect all persons and entities:
- who hold environment protection licences (EPLs) issued under the Protection of the Environment Operations Act 1997 (POEO Act);
- who are required to comply with a management order issued under the Contaminated Land Management Act 1997 (CLM Act); and/or
- who hold a radiation management licence (RML) issued under the Radiation Control Act 1990 (RC Act).
In this regard, we note that the EPA has a long-standing power to, in certain circumstances, require the abovementioned classes of people to provide a financial assurance:1 However, as a matter of practice, the EPA has tended to only exercise this power when regulating the waste industry, where the financial assurances required by the EPA range from a few thousand dollars to hundreds of thousands of dollars. To date, other industries and activities regulated by the EPA have escaped conditions of this nature. However, the release of the Draft Policy and Draft Guideline makes it clear that this is set to change.
The Draft Policy explains that, while the EPA proposes to expand the role of financial assurances, the EPA does not propose to impose a financial assurance condition in all EPLs, management orders and RMLs. To assist the EPA to decide when to require a financial assurance, the EPA proposes to apply a risk categorisation system. If you fall within either the medium or high-risk category, then you are more likely to be required to provide a financial assurance than those within the low-risk category.
The factors considered by the EPA when determining the appropriate risk category include whether:
- your operations use toxic or hazardous products, or generate toxic or hazardous wastes;
- your operations have the potential to impact sensitive receptors;
- you have a poor compliance history;
- your operations are a source of offsite impacts; and
- contamination within or migrating from your land is a source of offsite impacts.
What is a financial assurance?
In general terms, the purpose of a financial assurance is to secure or guarantee funding for the costs of carrying out works required by an EPL, management order or RML. In the event that the required works are not carried out to the satisfaction of the EPA, the EPA can (after giving prior notice and an opportunity to make submissions)2 access the financial assurance and use those funds to carry out the required works itself, or pay others to do so. If this occurs, the financial assurance may need to be replenished.
The two main kinds of financial assurances accepted by the EPA are:
- An unconditional bank guarantee, being an undertaking given by a bank, on behalf of a customer, to pay a defined amount to the EPA. Almost invariably, banks require the customer to provide capital or other assets as security before issuing a bank guarantee.
- A surety bond, being a contract between the relevant party, the EPA and the bond provider, where the bond provider promises to pay the EPA a defined amount. As a general rule, a surety bond involves paying a fee to the bond provider.
How can the EPA require me to provide a financial assurance and what can I do about it?
The EPA can require financial assurance by way of a condition in an EPL, management order or RML. It can also require a financial assurance for ongoing actions on the suspension, surrender or revocation of an EPL or RML.3
However, before requiring a financial assurance, the EPA may first require, including by way of a condition, an independent assessment of the cost of carrying out the work or program in relation to which the EPA proposes to require a financial assurance.4
Under the Draft Policy and Draft Guideline, the independent assessment involves the following two steps:
- Step One: Preparation of a cost estimate.
- Step Two: An independent assessment of the cost estimate, conducted by a registered company auditor.
New conditions, including those related to financial assurances, can be appealed in the Land and Environment Court.5 Please note that there are strict timeframes in which these rights must be exercised.
Note, if you have already provided a financial assurance, the Draft Policy indicates that it is unlikely that the EPA will require any changes to it until your next scheduled review of the licence or financial assurance condition.
What about environmental insurance?
The Draft Policy and Draft Guideline are focused on financial assurances. However, the EPA expressly notes in the Draft Policy that, in addition to being able to require a financial assurance, it also has the ability to require EPL holders to take out and maintain an environmental insurance policy.
Particularly in circumstances where the EPA is concerned that an activity regulated by an EPL may result in unexpected pollution and contamination events, it is possible that the EPA may impose a condition in an EPL requiring that environmental insurance be held and maintained. Such a condition may be imposed regardless of whether or not a financial assurance is also required.
The current public consultation period is a key opportunity to influence how the EPA decides whether to require a financial assurance and, if so, the quantum of that assurance. As such, it is important for all interested stakeholders to consider making a submission.
This is particularly the case for all entities who hold, or are subject to, EPLs, management orders or RMLs, for whom the Draft Policy and Draft Guideline may have significant financial implications.