Gain a Competitive Advantage Using Surety Bonds
The U.S. solid waste management industry, a market that combines residential, municipal, commercial and industrial customers is a highly competitive business. Therefore, operational efficiencies are crucial in obtaining and sustaining a competitive advantage. Using a surety bond as a companys financial assurance mechanism can provide an advantage to smaller, private owners.
New Regulations Strengthen Financial Assurance Requirements
Subtitle D Regulations (1991 1993) required stringent engineering of solid waste landfills including liners, leachate collection/monitoring and gas collection/monitoring. Subtitle D also required landfill operators to increase financials reserves for closure and post-closure monitoring. The regulation established strict requirements and standards for groundwater monitoring and remediation, liner design including composite soil standards, synthetic requirements and financial assurance requirements.
Each state has laws and regulations governing the generation, storage, treatment, handling, transportation and disposal of solid waste. 2012 saw certain states EPAs propose new rules for existing construction and demolition debris landfills to control leachate. For example, the Ohio EPA said it found leachate from the landfills posed a threat to public health and the environment if it is released to ground water or surface water. Consequently, new post-closure care periods are being extended to five years and increased financial assurance amounts are being implemented.
With four dominant public companies operating and controlling approximately 70% of remaining landfill capacity in the U.S., more stringent closure/post-closure care requirements will continue to make the financial assurance mechanism increasingly difficult for the smaller private companies and municipalities.
Financial Assurance Mechanisms
There are several allowable financial assurance mechanisms that an owner/operator may use alone, or in combination to demonstrate that they meet the closure and post-closure care financial assurance requirements. They are:
- Surety Bond Guaranteeing Payment or Performance
- Trust Fund
- Letter of Credit
- Corporate Financial Test
- Local Government Financial Test applicable to municipalities
- Corporate Guarantee
- Local Government Guarantee applicable to municipalities
Surety Bond vs. Letter of Credit
For Smaller Private Owners/Operators, its important to understand that surety bonds differ considerably from letters of credit. The critical difference between surety bonds and letters of credit becomes very clear at the time of default since the letter of credit is a pay on demand financial instrument. However, with a surety bond (closure/post-closure bond), the surety company has a duty and responsibility to both the contractor and the obligee (State Agency) to investigate default and verify the validity of the claim. The surety has the option to step in and finance the contractor or provide other support; should these not be feasible, the surety may pay the penal sum of the bond.
Additionally, letters of credit are typically provided by the bank with a requirement for the contractor to pledge specific assets (usually 100%) to secure the bank letter of credit, while surety bonds are issued on an unsecured basis subject to the financial strength of the company and possible personal guarantee of the owners.
Prior to issuing a closure/post-closure or other performance bonds, the surety company will make certain that your company has adequate financial resources, the necessary experience and management skills. The importance of using a knowledgeable and experienced broker specific to surety to guide you through the process is paramount to a company obtaining the best possible terms and conditions for approval.
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