Reform the Financial Assurance Guideline
Financial assurance (FA) is financial security (cash or marketable securities) that guarantee the costs of complying with environmental objectives can be covered, should an owner or operator of a site be unable pay for remediation to due to bankruptcy or insolvency. Most waste facility sites covered by an Environmental Compliance Approval (ECA) require upfront financial assurance for potential clean-up and remediation costs.
The Ontario government now has an opportunity to formally review its financial assurance guideline and regulations to create a more equitable spread of financial burden of FA across all waste facility sectors. This review should consider solutions such as:
- Allowing single pooled evaluations for corporations with multiple sites;
- Adopting a risk adjusted financial assurance amount for companies with low risk of credit default (for example, as provided to mining operators under Ontario Mining Act);
- Adjust the inflation parameter for financial assurance to the Consumer Price Index, versus the Non-Residential Building Construction Index, to better reflect the historical need for FA funds;
- Expanding FA payment methods to include surety bonds, insurance, pooled concept and corporate guarantees.
A Barrier to Investment
The financial assurance guideline requires waste operators to assume a 100% risk of failure regardless of design, optional mitigation measures included in the facility design or operation. The cumulative total of site-specific financial assurance is currently in excess of the risk-based liability for environmental remediation. In total, the provincial government holds over $500 million in financial assurance for waste management facilities. Financial assurance is provided and held by the Ministry of the Environment primarily in the form of a Letter of Credit [LOC], which has a significant restrictive impact on the ability of a companies to invest, innovate and create employment. Comparatively, there is a very low risk of default. Minimal amounts of collected Financial Assurance have ever been used to remedy an operator failure.
LOCs are essentially “cash” from a corporate financial perspective, resulting in funds being unavailable for business operations. LOCs also restrict a company’s ability to invest in new facilities and integrate new environmentally beneficial technologies. The rising costs of financial assurance have reached a such a magnitude that developers will be discouraged from making waste systems infrastructure investments in Ontario. Allowing additional payment methods, such as unconditional bonds to be backed by a surety from an insurance company, may eliminate the need for some companies to provide cash-backing for their bonds, thus minimalizing the impact of opportunity cost to the individual company, and providing additional capital for infrastructure investment.
Currently, financial assurance is specific to a property or facility. Site-specific financial assurance does not provide the flexibility necessary to address the potential remediation risk within the waste sector. A pooled financial assurance system (for example, an individual corporate fund to cover multiple sites) would place a greater emphasis on prevention and provide more flexibility in allocating funds as needed for remediation of contaminated sites, resulting in higher levels of environmental protection.
The low level of risk associated with waste sites should also be better utilized in FA calculations. Adopting risk-based financial assurance evaluations for corporations would recognize the very low likelihood of corporate default or operator failure. This would more fairly allocate FA burdens according to risk, while maintaining high levels of environmental protection.
Recommendations to Reform the Financial Assurance Guideline:
- Reduce Costs: Allow waste sector operators with multiple sites, with good financial and environmental standing, to have access to a single pooled concept financial assurance evaluation.
- Modernize Inflation Parameters: Adopt a more appropriate inflation parameter, such as the Consumer Price Index, in place of the Non-Residential Building Construction Price Index (NRBCPI).
- Re-allocate Burden of Risk: Adopt risk-adjusted financial assurance calculations for companies with good environmental records and low likelihood of corporate default or operator failure (for example, as provided to mining operators under Ontario Mining Act).
- Enhance Flexibility: Expand allowable payment methods to include surety bonds, insurance, and corporate guarantees. Allow unconditional bonds to be backed by a surety from an insurance company.
Documents: OWMA 2020 Economic Recovery Submission