Making PFI/PPP waste projects work
Ann Barrett, vice president of the environmental practice of Marsh, discusses risk management of waste projects
The UK waste sector is undergoing major structural changes stemming from the implementation of the government’s waste strategy, the Environmental Protection Act 1990, and introduction of Part II A of the act – the Contaminated Land Regime.
These changes are also influenced by the Landfill Directive, Integrated Pollution Prevention and Control, and the proposed EU Directive on Environmental Liabilities.
In addition, there are signs that major players in the waste sector are changing their commercial offering. It is likely that the sector will segment into companies which will provide:
- management of the waste stream;
- disposal operations; and
- technological expertise and equipment to facilitate waste reduction, preparation and recycling.
Local authorities frequently outsource waste stream management and are looking to achieve the new recycling, reuse and disposal targets through high-value contracts involving public private partnerships and private finance initiatives. Such contracts appear financially attractive but waste management companies need to pay attention to the detail of the contract and to the management of the associated liabilities.
The latter can arise from the physical, contractual and ultimately the financial management of the contract; companies therefore require a holistic risk management approach as the inability to fulfil contractual requirements can have a substantial negative impact on reputation and financial standing.
Managing the risks
An integrated risk management programme will provide the information to manage risks and the physical, contractual and financial solutions for cost-effective risk management. It will also provide the added benefit of setting targets for risk reduction and rendering the risk more attractive to financiers.
The process of assessing liabilities, allocating liabilities and designing solutions to enable all parties to control and manage risk is complex and requires a number of technical and financial skills. Should inadequate due diligence be completed, or if access to the whole range of solutions is limited, then those involved in the PFI process may be exposed to greater risk and potential losses than would otherwise be necessary. For example, just one of the key areas that must be addressed for the waste management industry is in environmental liabilities.
The waste management sector’s primary objective is to cost-effectively manage and minimise the effects of any pollution that results from its operations. This involves identifying and evaluating risks, implementing minimisation strategies, and then reassessing the risks and taking any further corrective action necessary.
In addition to physical risks, waste companies need to consider potential causation linkage and any resulting liability, arising for example from dust, odour, or flies. Historic and operational environmental liabilities associated with contracts must also be managed to protect all parties involved. The most satisfactory approach is to view these contracts as a separate business, ring fenced and risk managed in a way that enhances the parent company and minimises potential negative effects. Management of the environmental exposures can be achieved by:
- pure risk transfer by insuring against a pollution liability which could also result in third party bodily injury and property damage claims;
- risk management strategies; or
- a combination of risk transfer and risk management. A combined programme allows companies to use risk management techniques and to set aside funds to meet
potential claims from historic/legacy exposures.
New development in environmental risk
The use of combined risk management and insurance is a new development in the field of environmental risk. There are a small number of practitioners in this area who can claim any depth of experience, particularly with regard to the risks associated with PFI/PPP. Recent experience with MoD PFI contracts for long-term utility service provision has, however, been a useful lesson to all parties to the contract including the ministry, those submitting tenders, those providing finance and deal advisers.
Environmental risk management requirements pertinent to PFI/PPP contracts start with identifying physical, legal, contractual and third party and first party environmental risks and assessing the financial implications of the identified risks. The process carries on through recommending mitigation measures to eliminate, reduce or transfer identified environmental risks all the way through to developing an effective strategy to demonstrate clearly to interested parties that environmental risks are being properly managed.
In the case of environmental insurance considerations, these should include everything from reviewing tenders, proposals and bids associated with environmental
investigations and remediation programmes to negotiating policy wording and placing the selected environmental insurance solution.
The environmental impairment liability (EIL) insurance market offers cover for pollution liabilities but requires waste management companies to demonstrate good risk management protocols. These are not limited to having ISO 14001 or a bespoke EMS, which tend to focus on obvious exposures such as leachate, groundwater and landfill gas management. Other factors contributing to the risk management profile include management of tanks, microbial matter, third party complaints, the company’s relationship with regulators, and its claims experience.
A number of specialist environmental insurance policies can be utilised to protect organisations against losses arising from major development projects. These include pollution legal liability; contractors pollution liability; remediation cost cap; environmental warranty/indemnity insurance and project-specific environmental insurance. The complexities and cost of each solution is heavily influenced on the situation identified by the risk management approach taken.
Of particular significance is the coverage of a PFI contract by the use of contractor’s pollution legal liability cover. This particular EIL product can provide cost effective coverage which is not ‘data hungry’ and is closely aligned with the operation/activities to be carried out under the PFI/PPP contract. This product provides coverage for the operations of the PFI/PPP. However, if cover is required for historic liabilities then a site-based product may be more acceptable.
The application of EIL products as a vehicle to aid the management of environmental risks for both the new contractor and the historic authority can ensure that
environmental liabilities are actively managed and liability coverage is managed when they materialise.