09 June 2011

Cleaning up our act

With land at a premium in Australia's largest cities, the last 10 to 15 years have seen an upsurge in the conversion of former industrial sites to residential use. Many industrial sites have contaminated soil and groundwater, requiring remediation before they can be approved for homes.

Reliable estimates place the number of contaminated sites at more than 80,000 nationally. Given the potential implications for investment risk, public health and environmental sustainability, you'd think it would be relatively straightforward to find out whether and how a site is contaminated, and who's responsible for remediation. Not so.

"Federally, there are general guidelines for assessing site contamination," says RMIT financial accounting specialist Professor Craig Deegan. "At the State and Territory level, 'polluter pays' and strict liability principles mean that the person or entity that contaminated the site is responsible for assessment and clean-up. There's no need to prove intent, negligence or fault."

In practice, the situation is murkier. If the polluter is no longer in business, or if they can't afford the clean-up costs, responsibility passes to the owner or occupier. If responsibility can't be established, the buck passes to the relevant State or Territory government.

What's more, although there are national contamination assessment guidelines, responsibility for management lies with State, Territory and, occasionally, local governments. "Some jurisdictions have contaminated site registers," says Deegan's colleague Sophia Ji, "but these registers are rarely comprehensive. Some jurisdictions don't have registers, while others don't require responsible parties to remediate contamination at all."

Company balance sheets aren't much help, either. "It's a breach of Australian Accounting Standards to include items in a balance sheet unless they can be measured reliably," says Deegan. "If the owner knows they have contaminated sites, but can't reliably estimate assessment and remediation costs, they're not required to disclose the sites in the balance sheet."

Against all this, approval standards for rezoning land from industrial to residential use are becoming increasingly high. "This can make remediation costs quite prohibitive," Ji says. "Investors need to weigh the risks against the benefits of eventual redevelopment."

Investors aren't completely powerless in this situation. They can make the contract of sale subject to an environmental assessment by an independent expert, or negotiate a cheaper purchase price in return for taking the responsibility for remediation.

However, Deegan and Ji believe several reforms would place investors in a stronger position. "First," says Deegan, "there should be mandatory disclosure of known contaminated sites, via a national register. Such a register would include information about each site's location, past and current ownership, the nature of contamination, responsible parties, and the extent of remediation.

Second, the Federal Government should amend the Corporations Act to require that companies disclose contaminated sites in their directors' report or notes to the financial statements, even if they can't put a figure on the clean-up cost. "Simply knowing these sites exist would help investors make better informed decisions," says Ji.

Finally, Deegan and Ji believe the accounting profession should develop guidelines for stricter disclosure of contingent (potential) liabilities, including contamination remediation costs. "In the end," says Deegan, "it's about risk assessment and right-to-know. The more information investors have, the better for them, potential residents and the local environment."

This story was first published in RMIT's Making Cities Work magazine.

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