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5.2.10 Economic contect

Contents
5.2.10.1 Funding mechanisms
5.2.10.2 Life cycle costing
5.2.10.3 Planning for new and operational installations
5.2.10.3.1 Sources of funds
5.2.10.3.2 Fund structuring
5.2.10.3.3 Management of funds
5.2.10.4 Management of legacy sites
5.2.10.5 Future land use

While in the near term each country will have its own existing and proven institutional and financial mechanisms, there is no guarantee that these will continue in the longer term [Wright]. Priorities are likely to be vastly different from current ones; and even though public interest may call for significant stewardship programmes, there may be economic constraints to achieving this. It is important, therefore, to reappraise the mechanisms for financial provision on a relatively regular basis. Some areas worthy of further consideration for developing the protocols that future generations may demand are:

  • Funding mechanisms;
  • Life cycle costing;
  • Planning for new and operational installations;
  • Management of legacy sites.

5.2.10.1 Funding mechanisms

While the need for long term stewardship has become more widely accepted, major issues remain about how to best fund (or pay for) the required activities and in many cases about who will be responsible to ensure these activities are funded and implemented.

In response to the question of who is responsible, many countries today have adopted the principle that the polluter pays. This means that the originator of a contamination is responsible for covering the cost of adequate remediation measures as well as the long term stewardship of the site in question. The thus defined responsible party may be the company that is implementing/operating the installation and profiting from it or it may be the final consumer who is benefiting from the goods or services rendered by it. In many cases the originator of the damage may have ceased to exist, or it is difficult, even impossible, to attribute a contamination to a certain agent, owing to multiple contamination events, thus resulting in ‘orphan’ contamination with no identifiable responsible party. Even when the responsible party is clearly identifiable, it may not have set options to ensure adequate funding to meet long term stewardship requirements, in which case an alternative funding mechanism has to be put in place. Contaminated areas are often located in zones that are in need of economic revitalisation for other reasons.

Assuming that long term stewardship will require funding for an unprecedented length of time (hundreds or thousands of years), innovative (or innovative adaptations of familiar) financial solutions will be required.

The funding options for nearer term challenges may be different from those for the longer term. Five basic criteria may be considered when financing long term stewardship:

  1. Financial security;
  2. Clear rules, roles and responsibilities;
  3. Public information;
  4. Enforceability;
  5. Permanence.

These criteria can also be used to consider the strengths and weaknesses of other funding approaches. It should be emphasised that the raising of funds is only one of the issues to be contemplated when dealing with long term liabilities. The adequate treatment of these will require the implementation of a system capable of integrating in a coordinated way the technical, legal, financial and managerial (decision making and follow-up) aspects towards addressing long-term liability issues in their broader dimensions.

5.2.10.2 Life cycle costing

Traditional costing approaches normally take into consideration the so-called conventional costs, i.e., direct and indirect cost items that cannot be avoided by the organisation undertaking a certain project: capital costs, equipment, energy, utilities and supplies.

Life cycle management requires the adoption of broader costing concepts in which all costs involved in the implantation of the project, from the initial planning phase to the decommissioning and stewardship phases have to be taken into account (Figure 5.3). This life cycle costing concept is a key issue when developing financial instruments to cover long term liabilities including stewardship.
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Figure 5.3 Life cycle costs
Figure 5.3 Life cycle costs

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In the case of a privately owned installation aimed at generating profit, the fact has to be taken into account that the installation will produce revenues for only a certain period of time. However, the costs involved in the correct management of environmental and societal issues may extend in time far beyond the operational period of the installation. As a consequence, a concept similar to that of a pension plan needs to be developed to cover the costs that will be incurred after the installation ceases operation. The concept is similar to that of a personal pension fund in the way in which provisions are made during the period in which a person is generating income to cover the final period of life. In fact, the same concept can be applied to all kinds of installations, whether private or public.

5.2.10.3 Planning for new and operational installations

5.2.10.3.1 Sources of funds

New installations are best planned to follow the concept of life cycle costing from their very early phases, in order to provide adequate financial coverage to meet future liabilities and to promote the identification of the actual environmental costs, encouraging greater efficiency in the use of resources.

In the case of installations already in their operational phase, it would be beneficial to carry out life cycle cost planning for their residual life, not only because that necessitates a thorough environmental audit and risk assessment of the installation but also because it allows for planning of the financial and technical requirements to meet all future liabilities, including those previously unrecognised.

In both cases there is the possibility to set up funds on the basis of current income streams. The provision of funds for long term liabilities needs to be planned in such a way that when the installation stops operating and income generation ceases, the present value of the funds accumulated to that date is equivalent to the present value of the cost to be incurred until the end of the life of the installation (including the stewardship phase) under a life cycle costing perspective. Many countries now make long term liability funds a prerequisite for the issuance of licences for new installations.

5.2.10.3.2 Fund structuring

Six principles may be quoted that should be observed when structuring a financial guarantee vehicle to cover long term liabilities (Table 5.4).

Principle Requirements

Life cycle costs after operations cease Financial guarantees must cover all the installation’s costs, including those incurred after the end of operations.

Liquidity All forms of financial guarantee should be reasonably liquid.

Accessibility Financial assurance should be readily accessible, dedicated and only released with the specific assent of the regulatory authority or other decision making body.

Financially robust guarantors Regulators must carefully screen the financial health of guarantors before accepting any form of assurance.

Public involvement The public should be given notice and an opportunity to comment both before the setting up of the fund and before any decision on whether to release resources from the fund.

Lack of a substitute Any financial guarantee should not be regarded as a surrogate for the company’s legal environmental liability.

Table 5.4 Financial guarantee principles

One of the methods that have been identified as a useful approach to ensure funds are available is known as a trust fund. A trust can provide a mechanism to ensure that the funds necessary to fulfil long term responsibilities are available.

5.2.10.3.3 Management of funds

In addition to the fund raising process, appropriate management of funds is a key issue for the effectiveness of the long term management strategy. A number of roles have to be accomplished by various agents in this management process. The main roles to be accomplished in any system designed to correctly manage environmental liabilities are:

  1. Identification of environmental liabilities (life cycle costs that have to be covered by the fund to be put in place);
  2. Provision of resources to cover the environmental liabilities (which typically is the task of the ‘problem holder’);
  3. Administration of funds in order to ensure their soundness in the long term (a typical asset management function);
  4. Making of decisions about the use of funds for environmental remediation actions, and follow-up on the efficacy of these actions;
  5. Implementation of remedial and stewardship activities (actions to reduce environmental liabilities);
  6. Regulation and auditing of the system (to ensure its overall efficacy and effectiveness).

These roles can be carried out by the different agents potentially involved in the process. Typical agents that may be involved in one or more roles are:

  1. Owners of installations;
  2. Governments;
  3. Final site users;
  4. Financial management companies;
  5. Fund management boards;
  6. Contractors (companies responsible for remediation actions).

Different systems may be devised to combine the roles to be performed by the potential agents involved. It is important to note that although the roles listed above must be performed in any conceptual system, not all the agents actually have to be involved. According to these conditions various systems may be devised, from simpler ones (in which many roles are played by each agent) to more complex ones (in which responsibility is distributed among several independent agents). Figure 5.4, Figure 5.5 and Figure 5.6 illustrate three potentially feasible systems for the administration of funds for liabilities.
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Figure 5.4 A liability management system with two agents
Figure 5.4 A liability management system with two agents

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Figure 5.5 A liability management system with three agents
Figure 5.5 A liability management system with three agents

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Figure 5.6 A liability management system with four agents
Figure 5.6 A liability management system with four agents

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In the case of closed installations and legacy sites, the funds cannot normally be raised from the revenue streams of the operations. Governments might be presumed to be the first candidates as a source of funds for these cases. However, unless the liability was originated directly by governmental activities at the site, in which case the government is the actual holder of the liability, the government may not be prepared to assume this role.

5.2.10.4 Management of legacy sites

In general, all those that could potentially be held liable would be investigated, such as current site owners/operators, former site owners/operators, owners/operators of neighbouring sites that might have (had) an influence on the site in question and local/regional government bodies. In these cases, it is possible to compel the potentially liable party to respond to the damage in question. This normally should follow a three stage process:

  1. The first stage should involve identification and characterisation of the potential liability holder(s);
  2. The second stage should comprise the demonstration of the legal obligation of this party or these parties for the liability;
  3. Finally, the third stage should involve the enforcement of the liability holder’s duty to pay for the necessary environmental recovery actions or to conduct them according to a plan approved by the regulatory authority.

For many instances of uranium mining, the responsible party is in fact the government or the responsibility has been accepted by the government since the operation has been in the national interest. In circumstances where it is impossible to make the original owner undertake the remediation, it is likely that the government will be required to manage the situation. It is not rare, however, that the needs in terms of resources for site remediation exceed by far the (annual) budget available. Some form of prioritisation of activities will be unavoidable. A particular problem inherent to government budgeting is the usual short cycle of a few years at best, which makes it difficult to provide for long term commitments such as stewardship needs.

In some cases, it is possible for the government to recover part of the costs incurred through an increase in land value after site remediation by selling the site for reuse. A variant on this, but applicable mostly in urban areas with an active property market, is to transfer the land to private investors with a binding obligation to remediate the land according to prescribed standards and, if needed, to provide for long term stewardship. The financial incentive for the investors is the difference between their expenditure for remedial and stewardship activities and the resulting land value. Various combinations of taxpayer and privately funded remediation and stewardship plans (public-private partnerships) can be imagined provided they are adapted to the situation in hand.

5.2.10.5 Future land use

In some countries, there is an ever increasing tendency towards avoiding further exploitation of green field sites and restricting new developments to sites with a previous industrial history. Redevelopment potential can be a key factor in ensuring the viability of a remediated site and the associated long term stewardship programme. Redevelopment of the land, however, requires that the land has been remediated to residual levels of contamination that are compatible with its intended use. It is likely that in many non-accident scenarios only restricted releases will be feasible and that the stewardship process will need to cover the management of the future land use. Controlled reuse of a site may generate sufficient revenue to finance the cost of the necessary institutional control and may also prevent or minimise misuse that might jeopardize the institutional controls.

Reuse may come in a number of guises, for example, housing, new industries, recreational facilities, museums or even authorised disposal facilities. Monitoring of the site will need to be an ongoing process and may at a later date find that a breach of the containment system has occurred. A mechanism, therefore, needs to be in place that will allow a re-evaluation of the site’s status, because the original judgement will have been made on the basis of environmental risk assessment work at that time.

If the individuals who are actually benefiting from the reuse within the stewardship process are involved, this may increase the probability of continuity and orderly records management, as they may have a vested interest in the process. The objective is to create a sense of ownership in the use scenarios that are compatible with the stewardship requirements.

The development potential of a redundant site is often dependent on one or two key assets left over from the operating life of these sites (experience from the mining industry). These assets can provide an important catalyst to a particular kind of development or serve to improve the attractiveness of the site as an investment proposition for developers

Example 5.1: Identification of a key asset

In one example, the key asset was a high quality sports and social club built in traditional style and with excellent facilities. It was originally provided for employees and their families on the edge of the production site but served as the basis for redeveloping the site as a leisure park, also making use to the mine waster as the focal point of a new golf course.

An important step in exploring the redevelopment potential of a site is to identify these potential key assets and assess their relevance to future development scenarios. Once identified these assets need to be protected from deterioration during the transition from the previous use to the new use with stewardship requirements. A particular threat is the paradigm shift from operation to remediation and reuse that often results in neglect of infrastructure by previous owners or their agents.

The (re)drawing of site boundaries and the disposition of certain features, such as impoundments for contaminated residues, will have a strong influence on the usability and the redevelopment potential of a site. It is of great advantage if these factors can already be considered during the decommissioning and remediation phase, or even better when worked into the original operational plan. Features to consider include ease of access, convenient shape of plots, as well as connections to services and other infrastructure such as roads, railways, sewerage systems, drinking water supply and the electric grid.

There may also be certain protected uses that could be explored, for example cemeteries. In some cultures, certain persons (e.g., priests or medicine men) may impose taboos on sites or particular uses of sites. However, the longevity of such restrictions is difficult to predict. On the other hand, socio-cultural development in some parts of the world may make these societies more conducive to the earlier instruments of institutional control.