by John Waters
Rushing to Closure Comes at a Cost
Many companies are under considerable pressure to quickly reduce their manufacturing capacity. This is due to falling consumer demand, cost reduction drives and the need to maintain cash flows. In turn, organizations are consolidating and closing facilities; as we have seen across the automobile industry in recent months.
However, if there is a rush to closure, it can jeopardize an orderly planning process. This will expose companies to heightened liabilities, costs and risks and potentially reduce the value they are able to extract from sites once decommissioning work is completed.
Controlling Liabilities, Costs and Risks, and Extracting Value
If there is a choice, in most cases it is best to initially idle or mothball a facility. This allows a company to restart operations when demand recovers. However, idling or mothballing is not just a matter of turning off the lights. Organizations need to set aside adequate budgets to account for maintenance, insurance, taxation and security expenses. Unforeseen liabilities and costs can also arise from ongoing permit and regulatory commitments.
In the present economic climate the costs of idling can be become a significant burden on an organization. Consequently, companies are turning to more aggressive decommissioning actions to remove idle assets from their balance sheets, such as:
- Redeveloping facilities for alternative uses;
- Preparing operations for sale; and
- Demolishing facilities to sell the properties.
Regardless of the action pursued; the future use of a site and the potential costs and liabilities of decommissioning work need to be identified and defined at the outset of a closure decision.
For example, if an organization hopes to sell a site after it is demolished, it needs to investigate and compare potential rezoning options and related property prices. Such investigation may reveal that it is preferable to close one facility over another. Site contamination also needs to be addressed, from asbestos and storage tank removal, to remediating chemically impacted building materials, and impacted soils. If neglected, these contamination issues will delay regulatory closure, reduce property values, and burden companies with long-term liabilities.
In addition, vacant sites need to be closely monitored. Without proper surveillance, they are left exposed to theft and vandalism. In the event that a site has not been decommissioned there is a risk that vandalism will lead to the release of hazardous materials, compounding remediation requirements and costs. Even more concerning is the risk that a member of the public will sustain a serious injury onsite, leaving a company liable for costly personal injury claims. If sites are left vacant over extended periods of time vegetation will reappear, and they may become habitats for protected species. This can lead to additional costs and delays if the species need to be removed before decommissioning work can begin. Yet, this can easily be avoided if sites are properly fenced.
Overseas facilities come with their own set of local regulations, environmental and social issues. As cost control efforts restrict travel budgets, companies are often left trying to address these issues from a distance. This heightens the need for professional oversight to examine subcontractor capabilities, verify decommissioning methods and disposal, and protect a company’s reputation by addressing local environmental and social issues. Potential job losses due to site closures in developing countries can also create tensions with employees, local communities and regulators. These tensions need to be carefully managed.
It is important for companies to work with a reliable partner who has local expertise to facilitate closures without incident.
Decommissioning is by its very nature complicated. Whether closures are local or international, organizations need to gain a thorough understanding of all the issues related to their site. This is particularly important in the current economic climate when decommissioning decisions have a short time frame and are in response to cost-cutting imperatives.
Companies need to take the following steps when planning decommissioning.
- Develop a compliance profile to make sure that any necessary permit conditions are maintained prior to completing closure or sale. In some jurisdictions environmental permits may have considerable value and should only be surrendered after thorough assessment.
- Employ appropriate levels of security to protect assets and scrap value from theft.
- Characterize hazards which may range from contaminated soil or building materials, to vandalism when a site is left vacant.
- Assess future use and develop a strategy to extract maximum value from redevelopment or future sale of the property.
- Identify short and long-term costs, and look for hidden expenses.
ERM can help companies implement this evaluation process and make informed closure decisions and set realistic goals. In turn, this will enable clients to find ways to reduce costs without escalating risk to leave a positive site legacy.