Following an extended period of consultation with licensees, industry groups and other stakeholders, the Environmental Protection Agency finalised and published its "Guidance on Financial Provision for Environmental Liabilities" in mid-September 2015. AWN Consulting has carried out a review of the document – the following notable amendments have been made since draft stage.

1. The, at times, rigid tone taken in the initial draft guidance has been notably softened. It is interpreted that this is to allow both the Agency and licensees greater flexibility in negotiating and determining suitable financial provision. AWN anticipates the management of the financial impact of such provision on the day to day finances of licensees will remain a significant challenge, however, the Agency states that they will "consider financial provision proposals on a case by case basis.... embracing core principles (stated on Page 3 of the document - Security, Sufficiency and Availability of the financial provision instrument) when making a decision".

2. The 2014 draft guidance document made several references to the requirement for extensive legal involvement in each step of the FP process and the intention of the Agency to pass its legal costs directly on to licensees. The wording in relation to legal review has been amended and it is now stated that "The EPA has incorporated its legal costs into its Licensing and Enforcement Charging policy". It is anticipated that licensees will welcome this change though AWN expects that significant legal input will remain a staple part of the financial provision process.

3. The Agency has revised its position in relation to the suitability of several of the potential financial provision options available. The 5 primary options covered in the guidance are secured fund, on demand performance bond, parent company guarantee, charge on property and insurance. (The mechanism for the secured fund process is the only option unchanged in the final guidance document). Notably the Agency has mentioned that it may also consider acceptance of other forms of financial provision including industry sponsored mutual guarantee funds or other group funds. It is understood this is in response to calls from some industry groups for establishment of a sort of "Superfund" i.e. a fund potentially contributed to by all or a group of licensees to cover environmental liabilities/closure costs arising from licensees or other parties becoming insolvent or otherwise defaulting.

a. The Agency had stated in the 2014 draft guidance that an on-demand performance bond was suitable for most liabilities but not inevitable closure costs. This has been amended and the Agency will now accept on-demand performance bonds for all liabilities subject to the credit rating of the surety, size of the bond etc. It should be noted that the Agency is entitled to immediately call on a bond, if a licensee fails to replace a bond prior to its expiry

b. The suitability of parent company guarantee instruments remains largely unchanged. The EPA has taken the position that a parent company guarantee will not be acceptable as provision for inevitable closure costs. The Agency also states that parent companies will only be accepted as guarantors if they "have a net worth acceptable to the EPA" and they must also "be financially independent of the licensee and demonstrably not reliant on the financial performance of the licensee". Ongoing demonstration of the financial strength of the parent as a guarantor will be required.

c. The Agency has softened its stance on suitability of a charge on property being suitable as financial provision. The initial draft stated that this instrument would only be acceptable on a very limited basis. The final guidance states that a charge on property is suitable provision for all liabilities. The only limitation is that the EPA may only accept a certain percentage of a property's valuation towards meeting the determined financial provision. This is to ensure issues arising from the inevitable fluctuations in property values do not present a difficulty over the longer term. (The Agency notes that it may also accept charges over other fixed assets as long as they are sufficiently secure.) Monitoring of the value of the assets is likely to be mandatory – where it is found that the value of the property has fallen below the agreed ratio, the Agency may exercise its charge on the asset.

d. It had been hoped by many in the industry that Environmental Liability Insurance would perhaps present the "silver bullet" to the difficulties surrounding financial provision but to date a limited number of suitable policy products have been made available to licensees and/or been agreed with the Agency. The Agency confirms that insurance cannot be used as suitable FP for inevitable closure costs. The Agency will however accept suitable "environmental liability impairment policies" for unknown liabilities. General third party liability policies are not acceptable. Impairment policies must provide cover to meet the requirements of the Environmental Liabilities Directive, cover for gradual as well as sudden incidents, provide for retroactive cover, i.e. effective from date of grant of licence etc A number of further requirements are cited in the final guidance and these primarily relate to the bona fides of the insurer; they must be authorised to provide insurance products in Ireland and have a financial security rating of at least A or equivalent (as defined by Standard and Poor's. In cases where insurance is accepted as FP, the EPA will require evidence that the policy has been replaced at least 30 days before expiry.

In conclusion, the revised final financial provision guidance published by the EPA has provided slightly more flexibility to licensees in determining their financial provision options in comparison to the initial draft guidance, however, it is anticipated that most licensees will likely continue to utilise a similar combination of on demand performance bonds, insurance products and parent company guarantees where possible to meet their financial provision requirements - as they did prior to the guidance. (The additional flexibility in acceptance of on demand performance bonds is welcomed however we anticipate that changes to the mechanism for "charge on property" instruments (including other fixed assets) is likely to be of benefit to a limited number of licensees.)

AWN expects that the decision to rule out a parent company guarantee as suitable financial provision for inevitable closure costs is likely to be a pressing topic of discussion in many boardrooms across the country in the coming months. It is our experience, in the use of the sister guidance document for ELRA entitled "Assessing and Costing Environmental Liabilities", that inevitable closure costs substantially outweigh the provision amount required for unknown incidents on most sites and the restriction imposed will mean licensees are limited to just 2 options, i.e. an on demand performance bond or secured fund to address inevitable closure. AWN notes that the Agency may, in limited circumstances, allow licensees build up a secured fund over time but the requirement to maintain an appropriate alternative financial provision instrument for the balance while the fund is built up means this is also likely to be of limited benefit.

Please feel free to contact our Environmental Liability and Licensing specialists to discuss your requirements and options; 

David Mc Dermott (Associate Director)

Fergal Callaghan (Director)