National Round Table on
The Environment and the Economy
Market Failures and
The Optimal Use of Brownfield
Redevelopment Policy Instruments
National Brownfields Redevelopment Strategy
Canadian Economics Association 37th Annual Meeting
Dr. Dan Hara
1066 Somerset St. West, Suite 406, Ottawa, Ontario, K1Y 4T3, 613-233-9509
hara@haraassociates.com
Hara Associates Reference: 1435
January 14, 2003
Abstract for Canadian Economics Association 37th Annual Meeting
Brownfields (underdeveloped contaminated urban land) are a significant environmental and
growth challenge for Canadian cities. Brownfield policy literature is dominated by analysis of
the United States in the liability context created by U.S. Superfund legislation. This paper,
sponsored by the National Round Table on Environment and the Economy (NRTEE), analyzes
the effectiveness of policy options in the Canadian context. In addition, the paper updates the
most recent quantitative estimate of public benefits to Canada for channelling urban development
into existing brownfields rather than greenfields. Potential benefits appear significantly larger
than previously estimated.
In the main paper, market failures affecting brownfield development are reviewed and analyzed
for their inter-relationships. Available quantitative estimates of the size of externalities
generated by the market failures are reviewed. Policy options for government intervention are
assessed for their effectiveness in addressing market failures, and ranked in groups recognizing
the interdependence of some possibilities. The analysis is supported by a review of available
literature on brownfield policy practice in the United States and Canada. A distinction is made
between marginally unprofitable brownfields (Tier II), and highly contaminated land (Tier III).
The resulting strategy is compared to the current approach in the United States.
Appendix C to the paper updates the public benefits to brownfield redevelopment estimated by
De Sousa (2002) for the Greater Toronto Area, and provides a rough projection to the national
level. Resulting national public benefits for brownfield redevelopment are estimated as high as
$7 billion annually.
The paper and the Appendices are supporting documents to the NRTEE’s National Brownfields
Redevelopment Strategy.
TABLE OF CONTENTS
1
BACKGROUND
1.1
1.2
1.3
BROWNFIELDS AND GREENFIELDS .............................................................................................. 2
MARKET FAILURE & THE ROLES OF GOVERNMENT AND THE PRIVATE SECTOR ................. 2
ECONOMIC AND SOCIAL BENEFITS OF BROWNFIELD REDEVELOPMENT.............................. 2
2
MARKET FAILURES & THE POTENTIAL FOR SELF-FINANCING
5
3
SOURCES OF MARKET FAILURE
7
3.1
3.2
3.3
UNDER-VALUATION: HOW BIG ARE COMMERCIAL BENEFITS TO THIRD PARTIES?............. 7
UNDER-VALUATION: SOCIAL AND ENVIRONMENTAL BENEFITS ........................................... 10
MARKET OVERESTIMATION OF COSTS OF BROWNFIELD REDEVELOPMENT ..................... 11
3.3.1
3.3.2
3.3.3
3.3.4
3.3.5
3.3.6
3.3.7
3.3.8
3.3.9
2
CIVIL RISK ........................................................................................................................ 11
REGULATORY RISK ........................................................................................................... 13
INFORMATION ASYMMETRIES ............................................................................................. 14
INSURANCE MARKET FAILURE ........................................................................................... 14
LACK OF ACCESS TO CAPITAL ........................................................................................... 16
REGULATORY DELAYS ...................................................................................................... 16
STIGMA AND RISK PERCEPTION ......................................................................................... 17
INDUSTRY-WIDE ECONOMIES OF SCALE IN INSTITUTIONAL DEVELOPMENT .......................... 17
TAX SYSTEM IMPEDIMENTS ............................................................................................... 17
4
KEY FEATURES OF AN EFFECTIVE BROWNFIELDS STRATEGY
18
5
RANKING EFFECTIVENESS OF INDIVIDUAL POLICY INSTRUMENTS
20
5.1
5.2
5.3
5.4
5.5
5.6
5.7
5.8
TAX REFORM/INCENTIVES ........................................................................................................... 20
DIRECT FINANCIAL ASSISTANCE................................................................................................. 23
CAPITAL MARKET INTERVENTIONS ............................................................................................ 25
CIVIL LAW REFORM ....................................................................................................................... 27
REGULATION .................................................................................................................................. 31
INFORMATION................................................................................................................................. 34
INSTITUTIONAL DEVELOPMENT .................................................................................................. 35
DIRECT REDEVELOPMENT ........................................................................................................... 37
6
RANKING POLICY INSTRUMENTS BY GROUP
37
7
SITUATING THE NRTEE STRATEGY
39
Appendix A: Bibliography
Appendix B: Consolidated Table: Effectiveness of Commonly Used Policy Instruments
for Brownfield Redevelopment
Appendix C: Note on Rough Estimate of National Public Benefits for Canadian
Brownfield Redevelopment
Executive Summary
This study is undertaken in support of National Round Table on Environment and the Economy
(NRTEE’s) development of a National Brownfield Redevelopment Strategy.
The study provides a qualitative social benefit-cost analysis of the effectiveness of alternative
policy instruments for brownfield redevelopment. General characteristics of an effective
brownfield development strategy are identified, and policy instruments are ranked in groups in
order of likely effectiveness. Ranking by group recognizes the interactive impact of some policy
interventions. The analysis is supported by a review of available literature on brownfield policy
practice in the United States and Canada. A bibliography is provided in Appendix A.
The analysis:
•
•
•
•
•
Identifies the principal market failures causing poor rates of brownfield redevelopment
by the Canadian private sector.
Identifies key characteristics of an effective brownfields strategy to correct or
compensate for those market failures.
Establishes a generic set of the most common policy instruments used to address
brownfield redevelopment.
Rates individual policy instruments high, medium, or low according to their effectiveness
in addressing specific market failures.
Provided a ranking of effective policy instruments by group.
Relevant Market Failures
Markets, the free exchange of goods and services, do not always work well. When they fail, or
are imperfect, actions that increase the collective national wealth may not take place. This is the
case for brownfields. There are a number of significant market failures that prevent
redevelopment of land, even when the redevelopment would create enough wealth and income to
more than pay the cost.
Markets fail when a developer or landowner lack important information, or when decisions have
impacts on those who are not parties to the transaction. In the latter case, redevelopers and
landowners will naturally act efficiently in their own commercial interests. When there are
additional social interests or third-party interests to be taken into account, it is a role of
governments to find cost-effective means of introducing these considerations into the private
sector decision-making process.
The study divides market failures restricting brownfield redevelopment into those that cause
private developers to:
•
Undervalue Commercial Benefits. Market failures that cause undervaluing of the
income generating benefits of redevelopment to all affected parties. These include:
o Third-party wealth and income impacts.
o Infrastructure cost savings.
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o Transportation cost savings.
o Municipal services cost saving.
•
Overvalue Costs. Market failures that cause potential developers to assess higher
project costs than the true cost to society. These include:
o Tax system impediments.
o Regulatory Risk.
o Civil Risk.
o Information Asymmetries.
o Insurance Market Failure.
o Lack of Access to Capital.
o Regulatory Delays.
o Stigma and Risk Perception.
o Economies of Scale in Institutional Development
•
Exclude Social and Environmental Benefits. Private markets typically fail to capture
collective benefits such as environmental benefits, improved neighbourhoods, preserved
wetlands and greenfields, and health impacts not effectively recoverable through court
action.
The first two categories are found to be particularly important to Brownfield redevelopment
strategy, as they define Tier 2 brownfields – those for which redevelopment is most feasible and
likely to attract private interest.
If these market failures can be corrected, then private
developers will see them as profitable and development may proceed. Equivalently, if the
market failures cannot be corrected directly, but can be offset through financial incentives, then
the development will generate sufficient wealth and income in the tax base to repay the
incentives to the public budget.
Key Findings
There are a variety of policy instruments available to address these market failures. Appendix B
provides a list of the most commonly used, and summarizes findings on the relevant market
failures addressed and effectiveness of the tool.
The instruments selected by NRTEE
brownfields strategy are indicated in the table by recommendation number.
Study findings also included these conclusions on the desirable characteristics of an effective
brownfields redevelopment strategy:
•
Strategic measures should address both risk and financial incentives. While a great
deal of discussion has occurred around the market failures stemming from uncontrolled
risks faced by developers, correcting this alone would not achieve full realization of the
benefits available from redevelopment of Tier II land. The value of 3rd party wealth
creation would still not be included in the decisions of private sector redevelopers.
Available literature, suggests that the magnitude of these benefits is significant. To
introduce this factor into private decision-making, some form of financial incentives is
needed.
•
Project-by-project assessments required. To effectively deliver financial incentives,
whether as low interest loans or outright grants, a strategy will require components that
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assess the need for incentives on a project-by-project basis. The alternatives, such as
broad rules-based tax credits have two drawbacks if used exclusively: their effectiveness
will be diluted by transfers to Tier I lands as well as Tier II; and there is a risk of
transferring the entire social benefit of redevelopment to the redeveloper, at the expense
and administrative cost borne by the tax-payer.
Consistent with the second point, redevelopment of Tier 2 lands will range from brownfields that
are marginally unprofitable to those that require significant assistance to motivate the private
sector to take an interest. An effective strategy will utilize broad systemic measures to nudge
the former into redevelopment and apply increasingly focused incentives to the latter through
project-by-project assessment. From this perspective, the study ranks effective intervention
tools in the following groups.
Broad Systemic Measures
The following tools were found to be effective individually, and provide the highest yield with
minimal impact on the public purse. They are focused on correcting market failures leading to
developers over-valuing costs or requiring excessive rates of project return due to undiversifiable
risks:
•
•
•
•
•
Deductible remediation expenses (qualified by simple limits and eligibility rules).
Mortgage insurance for brownfield redevelopment (market making by the CMHC)
Lender liability limits
Time limits on civil liability
Proportionate allocation of civil liability (as opposed to joint and several liability)
Project-by-Project Measures
Redevelopments that are net-wealth creating, but further from break-even as perceived by the
private sector, will require more additional incentive with greater implications for the public
purse. To limit these expenditures to Tier 2 land, and on an as-needed basis, implementation
would have to be on a project-by-project basis. Ideally this would take place within a framework
of co-operation among different levels of government to avoid duplication. Depending on the
private sector viability of the project, required assistance might range from providing some
assurance limiting future risk of clean-up orders (at the low end), to loans and grants (at the high
end of assistance). Measures found to be effective in this group include:
•
•
•
•
•
•
Certificates of Compliance & Associated Public Insurance
Remediation loans
Project loans (e.g. revolving funds etc.)
Abatements
Tax forgiveness
Grants
Measures Increasing Leverage
Once the most substantive sources of market failure are addressed, there are additional policy
tools that increase the effectiveness of other interventions at reasonable cost. This includes better
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information to consumers, practitioners, and redevelopers, and measures to standardize and
develop institutions supporting brownfield redevelopment. Tools identified as effective in this
group are:
•
•
•
•
•
•
Standards of Practice (in regulation and professional practice)
Deed registration
Land pre-qualification
Public information.
Technology dissemination.
Training & capacity building.
The above sets may be implemented as groups. Jointly they are found to offer the highest level
of effective intervention for the redevelopment of brownfields by correcting market failures and
harnessing the efficiencies of the private sector.
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Market Failures & Optimal Use of
Brownfields Redevelopment Instruments
In December 2001, the Federal Budget Speech included these words:
Across Canada, as in most countries, contaminated land lies unused and
unproductive. Such sites, known as brownfields, may have the potential for
rejuvenation, bringing both health and economic benefits to local communities.
Therefore, responding to the Government, the NRTEE has agreed to develop a
National Brownfield Redevelopment Strategy in order to ensure that Canada is a
global leader in remediation.
This study is undertaken in support of National Round Table on Environment and the Economy
(NRTEE’s) development of a National Brownfield Redevelopment Strategy.
The study provides a qualitative social benefit-cost analysis of the effectiveness of alternative
policy instruments for brownfield redevelopment. General characteristics of an effective
brownfield development strategy are identified, and policy instruments are ranked in groups in
order of likely effectiveness. Ranking by group recognizes the interactive impact of some policy
interventions. The analysis is supported by a review of available literature on brownfield policy
practice in the United States and Canada. A bibliography is provided in Appendix A.
The analysis:
•
•
•
•
•
Identifies the principal market failures causing poor rates of brownfield redevelopment
by the Canadian private sector.
Identifies key characteristics of an effective brownfields strategy to correct or
compensate for those market failures.
Establishes a generic set of the most common policy instruments used to address
brownfield redevelopment.
Rates individual policy instruments high, medium, or low according to their effectiveness
in addressing specific market failures.
Provided a ranking of effective policy instruments by group.
The analysis also incorporates discussion of two specific issues:
•
•
The relative effectiveness and/or complementarity of regulatory/legislative measures to
address liability issues, versus the use of financial incentives.
The distinction between removing impediments in the tax system and the creation of new
tax incentives.
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1
1.1
BACKGROUND
Brownfields and Greenfields
“Brownfields” may be defined as abandoned, vacant, derelict or under-utilized commercial land
or industrial properties where past actions have resulted in actual or perceived contamination.
They range from small former sites of gasoline service stations to large parcels of land
previously used in manufacturing or processing. Left as they are, brownfields can harm the
local economy and pose a threat to human health and environmental quality.
The term “brownfield” is related to an opposite term: “greenfield”. Private sector real estate
developers often face the choice of locating their projects in “greenfields” at a city’s periphery,
such as farmland and wetlands, or in “brownfields” closer to the heart of Canada’s cities. For a
variety of reasons discussed in this paper, profit-maximizing private developers are more likely
to choose greenfields, leaving cities with a volume of unutilized or underutilized land in their
midst. This introduces a public policy problem, since there are collective economic and social
benefits to brownfield redevelopment.
1.2
Market Failure & the Roles of Government and the Private Sector
This paper applies a social benefit/cost perspective to brownfield redevelopment. Competitive
markets are assumed to offer advantages to society through the efficient coordination of the
economy. Within this framework, the self-interest of private sector agents is a virtue motivating
the coordination of the economy. It is a role of government to ensure a framework that harnesses
and directs self-interest to the common good.
When the incentives experienced by participants in the market place do not reflect all of the
relevant costs and benefits to society as a whole, it can be shown that markets will not produce
the result that maximize the common good. This is termed market failure. Governments may
correct market failure through improvements to the institutional framework within which
markets operate, or through offsetting financial incentives or disincentives.
In the case of brownfields, there are a variety of third party and collective benefits to brownfield
redevelopment. Since these are not captured by private sector self-interest, there is less
redevelopment of brownfields than would be optimal for the common good. This paper reviews
methods available to public authorities to improve the situation, while still making use of the
efficiencies of decentralized market coordination of self-interested private sector agents.
1.3
Economic and Social Benefits of Brownfield Redevelopment
Brownfield redevelopment offers a number of collective economic, social, and environmental
benefits.1 Economic benefits include:
1
In reality it is difficult to draw a distinction between economic, social and environmental benefits. Social
benefit/cost analysis, as practiced by economists, recognizes all things of value to humans as a benefit. In more
common language, economic benefits may be defined as those benefits that generate additional resources, or
resource savings, that may be in turn be devoted to serving other human needs. However, most social and
environmental benefits also fit this definition in the long run. For example, reduced juvenile crime rates from urban
redevelopment have long-term impacts on business overheads and costs of administering the justice system for
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•
•
•
•
•
•
Increased wealth generated by cities
Infrastructure cost savings.
Reduced transportation costs
Increased competitiveness
Competitiveness spin-offs in remediation
Increased jobs, income, and taxes resulting from remediation activity
Social benefits include:
•
•
Reduced illness and death
Urban-renewal social benefits
Environmental benefits include:
•
•
•
Preserved greenfields and wetlands
Reduced pollution.
Reduced greenhouse gases (GHGs) and global warming (as required by the Kyoto
Accord)
Each of these benefits is discussed briefly below. Where possible, quantitative indications of the
size of potential benefits are provided in italics. There are few quantitative estimates of the
value of brownfield redevelopment over greenfields, but the literature that does exist suggests
relative benefits may be substantial.
Increased Wealth Generated by Cities
Cities are the engines of Canadian economic activity and growth. Each achieves its role through
unique location advantages plus the shared characteristic of all cities: compactness.
Compactness means that economic agents are closer to one another, realizing lower transaction
costs and forming more complex working relationships. Brownfields reduce the compactness of
cities, in the worst cases forming areas that are simply bypassed by the city and its infrastructure.
Like most important factors governing economic development, the impact of brownfields and
compactness in general is not easily quantified. However, there are clear lower-bound estimates
that imply the minimum impact of redevelopment is high. For example, a portion of the
increased productivity of a city is captured in rising property values. Estimates from one recent
U.S. study2 suggest that as brownfields are redeveloped, surrounding properties within as much
as a 1.5 mile radius may rise in value by an average of 10%.3 Since the surrounding land area
may greatly exceed the land area of the actual brownfield, this represents a significant
adults. Reduced global warming has similarly clear economic impacts. Preservation of species has an impact on the
stock of bio-diversity accessible to emerging bioscience-based industries.
2
Ihlanfeldt, Keith R. and Laura O. Taylor (2002). Assessing the Impacts of Environmental Contamination on
Commercial and Industrial Properties. UC San Diego Division of Social Sciences Working Paper. (Sponsored by
U.S. Environmental Protection Agency.
3
More precisely, commercial and industrial properties near brownfields averaged 10% lower property value after
controlling for other location factors. Commercial and industrial properties are a more conservative measure of
reduced value of use, since they are not subject to the same magnitude of stigma effects as residential properties.
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incremental impact. For the study in question, property value differentials for the 44 sites
sampled amounted to $1 billion (US).
Infrastructure Cost Savings
Brownfield redevelopment channels new city growth into existing spaces, away from greenfields
at the periphery. Brownfield developments make more effective use of existing infrastructure.
Greenfield development requires new infrastructure to service it, including roads, water, power,
and waste disposal. A recent comparison of hypothetical brownfield and greenfield development
for the Greater Toronto Area found that using brownfields instead of greenfields for commercial
development yielded annual savings of an estimated $18 thousand per hectare in infrastructure
costs alone.4
Reduced Transportation Costs
Channelling growth into brownfields instead of greenfields also means people and goods travel
less. In addition to direct reduction in transportation costs for those affected, less road
congestion reduces transportation costs for everyone in the city. For residential brownfield
redevelopment, annual transportation cost savings have been estimated as high as $66,000 per
hectare redeveloped.
Increased Competitiveness
The effects of increased private sector productivity through compact land-use; reduced tax
burden to support infrastructure; and the improved business climate from better neighbourhoods
and reduced congestion; all combine to increase the competitiveness of Canadian cities seeking
development opportunities in the continental and world economy.
Competitiveness Spin-offs in Remediation
Remediation of land is an inevitable necessity in the long run. Canada faces the choice of
importing professional services and specialized goods, or developing the expertise domestically
and, perhaps, becoming a net exporter of brownfield redevelopment techniques and technologies.
Early action on brownfield redevelopment will contribute to the development of Canadian
expertise, as well as lowering costs of assessment and remediation as Canadian practice
improves with increased volume.
Increased Jobs, Income, & Taxes from Remediation Activity
Remediation of brownfields also yields immediate economic benefits in jobs, income and taxes.
A study commissioned in 2002 by NRTEE5 concluded that brownfield redevelopment has a high
multiplier effect – the degree to which initial dollars spent are re-spent within Canada. The high
degree of re-spending with Canada is because remediation is labour intensive (including skilled
labour) and intensive in Canadian produced goods and services.
4
5
De Sousa, Christopher (2002)
Regional Analytics Inc. (2002)
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Reduced Illness and Death
Contaminated land represents a health risk to people on surrounding lands. Toxic chemicals or
other pollutants may contaminate water and air, resulting in illness or death. While it is the
responsibility of provincial governments to address known toxic sites other than those that fall
under federal jurisdiction, not all sites are known. There is a disincentive for private landowners
to fully document past land use or to assess contaminants, since such information triggers
requirements to act. In addition, the cause-and-effect relationship between human health and
contaminants is not always clear. Elements that may be considered at safe levels in one year
may be found to be more dangerous as scientific understanding continues to advance. A further
complication is that human health impacts are not necessarily proportionate to levels of
exposure. Sometimes lower doses have worse impacts. Causation may also be indirect, where
contaminants reduce resistance to disease or to cancer.
Redeveloping brownfield results in fuller assessment of the risks of contaminants. Remediation
places contaminants under greater control. The result is reduced risk of human illness and death.
Over many brownfields and many people, the reduced risk manifests in real savings of lives and
health of individuals.
Urban Renewal Social Benefits
Not coincidentally, brownfields are often located in economically depressed neighbourhoods.
Such neighbourhoods experience a variety of social ills, including higher crime rates, poorer
health, higher unemployment, higher school dropout rates, etc. Brownfield redevelopment is
also about the economic redevelopment of neighbourhoods, which in turn reduces the incidence
of these social ills.
Improved Air Quality and Reduced GHG Emissions (Kyoto Benefits)
Channelling growth into brownfields instead of greenfields means results in more compact cities,
lower transportation demands, and consequent lower auto emissions of pollutants and
greenhouse gases. For example, it has been estimated6, again for the Greater Toronto Area, that
the average kilometres by car for a suburban is more two and a half times that of an urban
resident in a former brownfield, due to higher commuter distances and lower use of public
transit.
Average savings in fuel-based emissions is greater than this ratio, since fewer
kilometres means lower congestion and increase fuel efficiency for other travellers, especially at
peak commuter time periods.
2
MARKET FAILURES & THE POTENTIAL FOR SELF-FINANCING
Markets, the free exchange of goods and services, do not always work well. When they fail, or
are imperfect, actions that increase the collective national wealth may not take place. This is the
case with brownfields. There are a number of significant market failures that prevent
redevelopment of land, even when the redevelopment would create enough wealth and income to
more than cover the costs associated with that redevelopment.
6
De Sousa, Christopher. (2002)
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Text Box 2.1
Self-Financing - Tier 1 and 2 Brownfields
Relationship to Source of Market Failure
The figure below illustrates* the roles of market failures in defining Tier 1 and 2 brownfields, and the implications for potential selffinancing of redevelopment. The horizontal axis represents hectares of brownfield ranked in order of increasing cost of
remediation per hectare. The increasing cost is shown by solid line rising from left to right, “Cost to Developer”. A second solid
line, “Commercial Benefits to Developers” represents the decreasing $ return on land to developers as successively less
attractive properties are developed. The two solid lines meet at Point A. All land to the left of Point A will be developed by the
private sector under current circumstances since benefits to the private decision maker exceed costs – this is Tier 1.
However, the costs perceived by the developer are higher than necessary due to a variety of market failures, such as the inability
to diversify environmental risks. The true cost is represented by a lower dotted line “Cost Without Market Failures”. Similarly, the
developer does not account for additional income generated to third parties, such as neighboring landowners, by brownfield
redevelopment. This too is a form of market failure. From a government and social perspective, this additional productivity
represents an income stream that could repay the cost of brownfield redevelopment. Accounting for this additional income raises
benefits to the dotted line “Commercial Benefits to All Parties. The two dotted lines meet at point B. Land between points A and B
would generate commercial benefits to all parties more than sufficient to offset development costs, but will not be developed by
the private sector without correcting or compensating for the market failures. These are Tier 2 brownfields.
Beyond Tier 2 there are additional brownfields that, if redeveloped, t would also generate net social benefits, however they do not
offer the potential to be self-financing. The additional benefits, such as improved human health or preserved wetlands, are of
value to society individually and collectively but do not represent recoverable income streams that can be used for financing. This
is Tier 3, represented by Point C on the figure.
$/Hectare
Cost to Developer
C Cost Without Market Failures
Combined Commercial
and Social Benefits
B
A
Commercial Benefits
All Parties
Commercial Benefits
To Developer
Tier 1
Tier 2
Tier 3
Brownfield Hectares
Potentially Self-financing
(* A two dimensional diagram requires simplifying assumptions because land characteristics vary in many ways. The same propositions as
illustrated may be demonstrated mathematically.)
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Market failures restricting brownfield redevelopment may be broadly divided in those that cause
private developers to:
•
•
•
Undervalue Commercial Benefits. Market failures that cause undervaluing of the
income-generating benefits of redevelopment to all affected parties.
Overvalue Costs. Market failures that cause potential developers to assess higher
project costs than the true cost to society of the resources used. For example, the current
structure of civil and statutory liability for environmental risks (discussed further below)
can lead to over-estimated costs.
Exclude Social and Environmental Benefits. Private markets typically fail to capture
collective benefits such as environmental benefits, improved neighbourhoods, and health
impacts not effectively recoverable through court action.7
The first two categories above are particularly important to a brownfield redevelopment strategy,
as they define Tier 2 brownfields – those for which redevelopment is most feasible and likely to
attract private interest. If these market failures can be corrected, then private developers will see
the redevelopment of these brownfields as profitable and development may proceed.
Equivalently, if the market failures cannot be corrected directly, but can be offset through
financial incentives, then the development will generate sufficient wealth and income in the tax
base to repay to the public budget the cost of those incentives. Text Box 2.1 illustrates this point.
3
SOURCES OF MARKET FAILURE
Markets fail when a developer or landowner lacks important information, or when decisions have
impacts on those who are not parties to the transaction. This section addresses the most
commonly cited market failures, according to the three categories defined above.
3.1
Under-valuation: How Big are Commercial Benefits to Third Parties?
When developers redevelop a brownfield, they receive the direct commercial value of the
development they have created. This value, along with risk and cost, governs the decision as to
whether to proceed with a brownfield redevelopment project or, where the choice is available, to
develop a greenfield instead.
Not included in such private sector decisions are the benefits
generated to others which cannot be captured commercially by the developer or other
participants in the project. These benefits may be termed third party benefits.8 The third party
benefits include increased income to the third parties – which we will term commercial benefits.
Third party commercial benefits are all the “economic” benefits discussed in Section 1.2. They
range from the increased wealth generated by cities through greater compactness to the
immediate savings to the public purse from more effective use of existing infrastructure.
Because private participants in brownfield redevelopment do not capture these benefits, there are
brownfields whose redevelopment would increase net income and wealth of a city, but that are
not redeveloped because the redeveloper’s balance sheet, adjusted for risk, anticipates a loss for
the project. Thus, without intervention, the market fails to achieve the optimal redevelopment of
brownfields.
7
8
The market will take into consideration the risk of successful court actions.
Third party in this context refers to someone outside the transactions of a buyer(s), and seller(s).
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The size of these benefits is an important question for the suggestion that there are significant
Tier 2 brownfield sites that could be redeveloped on a self-financed basis. How much wealth
generation opportunity is being overlooked in current brownfield use, a little or a lot?
Although there is little quantitative data on these third-party benefits, available studies suggest
their size is significant. The literature focuses on the impact of brownfields on surrounding
property values. Although the potential for increased property value captures only part of the
potential increased wealth and income generation, it does serve as a useful lower-bound estimate
and provides an indication of the order of magnitude of third party commercial benefits to
brownfield redevelopment.
Evidence on magnitude begins with the larger literature on impacts of any property improvement
on surrounding property values. For example, a recent study of the city of Cleveland found for
each dollar invested in the development of a new home, housing within 150 feet increases in
value by 6.1 cents.9 In the reverse case, a study of Chicago found that abandoned residential
properties reduced the values of surrounding homes by 10% to 20%.10
The literature on brownfield property values may be divided into impacts on commercial
property11 and impacts on residential property. In both cases the majority of literature focuses
on the value of brownfields themselves, and the recovery in property value after remediation.
However, there are also estimates of impacts on neighbouring property values.
Estimates for the impact on commercial properties are the most useful, as the issue is less
clouded by discussion of whether residential homebuyers’ perception of risk and the resulting
stigma effects on price are rational or long lasting.
Impact on Commercial Property Values
The majority of available estimates suggest there is a significant impact by brownfields on
neighbouring property values and that a significant portion of this value is recoverable upon
redevelopment or remediation of the brownfield. For example:
•
In a recent U.S. study Ihlanfeldt & Taylor found that as brownfields are redeveloped,
surrounding commercial properties within as much as a 1.5 mile radius may rise in value
by an average of 10%.12 Estimated impact over 44 sites amounted to US$ 1 billion.13
•
Guntermann (1995) found that open solid waste land-fills depressed surrounding
commercial property values by as much as 45%, but that value was recovered when the
land-fills were closed (in addition to limiting future risks, closure typically included
remediation and control measures such water and methane containment systems).
9
Ding et al (2000) via De Sousa (2002), pg. 270.
Persky & Wiewel (1996) via De Sousa (2002) pg. 270.
11
Including industrial uses.
12
More precisely, commercial and industrial properties near brownfields averaged 10% lower property value after
controlling for other location factors.
13
Ihlanfeldt, Keith R. and Laura O. Taylor (2002), sponsored by the U.S. Environmental Protection Agency.
10
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•
De Sousa (2002) reports case studies where the redevelopment of one parcel of
brownfield land led to increases in the property values of neighbouring brownfield
parcels of over 50%.14
Impact on Residential Property Values
The impact of brownfields on residential property values is typically estimated to be larger than
for commercial land. However, there is a significant debate in the literature on how much of this
represents stigma rather than real risk or lost value of use (see for example McClusky & Rausser
1999a, Meyer & Reaves 1998). This debate in turn affects the question of whether remediation
can restore value, since pure stigma effects may perpetuate lower values if perceived risk is
decoupled from actual risk. Regardless of these distinctions, it is clear that the impact of
brownfields on surrounding property values is quite real. Some recent estimates:
•
Jenkins-Smith et al. (2002), in a case study in Corpus Christi, Texas, found homes within
1.609 km of a lead smelter, where real estate agents were required to disclose the possible
presence of lead, zinc and cadmium contamination and clean-up requirements in the
neighbourhood, lost an average of 30.5% of their value.
•
Bond (2000), in a case study of the Swan River, Perth, Australia, found that stigma
effects in post-remediated residential sites causes a decrease of approximately 30% in the
sale price of houses.
•
Dale et al. (1999), in a case study in the Dallas area, found that prices do eventually
rebound from stigma depression, though more slowly the closer to a contaminated site
and the poorer the neighbourhood.
•
Ketkar (1992), in a study of 64 municipalities in New Jersey, found that the clean-up of
one hazardous waste site in a municipality has the effect of increasing property values by
$1500 US on average. He further estimated that the cost of clean-up of 129 hazardous
waste sites would be $931 million, but that the resultant increased property values would
be $12.4 billion. The implied benefit-cost ratio exceeds 13 to one.
Impact on Infrastructure and Transportation
In addition to the broader wealth-creating impacts of brownfield redevelopment, there are the
more immediate impacts of reduced municipal infrastructure costs and transportation costs.
There is little quantitative literature in this area specifically related to brownfields. However, the
following are derived from a benefit/cost study of the city of Toronto (De Sousa (2002). De
Sousa integrated available quantitative estimates on transportation and infrastructure costs from a
variety of sources and applied them in a Canadian brownfields context. Net benefits were
assessed for two hypothetical cases: a commercial brownfield development and a residential
brownfield development. In each case, benefits are measured against the alternative case of
placing the same development in a suburban greenfield. Estimated benefits included:
14
Page 270.
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•
Infrastructure: For a commercial development it was estimated that using brownfields
instead of greenfields yielded annual savings of an estimated $18 thousand per hectare in
municipal infrastructure costs.
•
Transportation. For residential brownfield redevelopment, annual transportation cost
savings were estimated as high as $66,000 per hectare redeveloped. This includes the
impact of lower road congestion reducing transportation costs for all commuters.
De Sousa also allowed for a limited set of health benefits and impacts on surrounding property
values. Health benefits were not quantified but were assumed to be at least equal to remediation
and assessment costs.15 Neighbouring property value impacts were assumed to be a 5% increase
on an area of land equivalent to the redeveloped property.16 Resulting estimated benefits of
brownfield redevelopment for the Greater Toronto Area (relative to the same development in
greenfields), were $21 million to $32 million annually for industrial redevelopment, and as $16
to $23 million annually for residential redevelopment. These are in addition to whatever benefits
may be assessed from the projects themselves (as opposed to their location). Capitalizing using
a conservative 10% real rate of interest17 would make the equivalent one-time gains from $210 to
$320 million, and from $160 million to $230 million for commercial and residential properties
respectively.
Other Income Generating Third Party Benefits
These include the remaining benefits discussed in Section 1.3: increased competitiveness,
competitiveness spin-offs in remediation, and increased jobs, income, and taxes from
remediation activity. Quantitative impact on net income for third parties within Canada is not
available at this time. However, the absence of quantitative estimates should not be taken to
mean their values are not significant.
3.2
Under-valuation: Social and Environmental Benefits
The private participants in brownfield redevelopment decisions will also not fully account for the
non-commercial collective benefits, since their own individual portions of those benefits may be
small. These are the social and environmental benefits discussed earlier in Section 1.3, ranging
from health benefits to people neighbouring brownfields, to the value of wetlands and species
preservation from reduced use of greenfields.
Again, quantitative estimates of social and environmental benefits of brownfield redevelopment
benefits are not available, but they remain significant benefits which Canadian society values
collectively.
15
In other words, it was assumed that environmental regulations requiring clean-up themselves passed a test of
reason where the cost of clean-up was less than the value of expected health benefits.
16
As noted above, actual property value impacts have been found to be greater than 5%.
17
The real rate of interest is interest after inflation. The estimate of 10% is a real social rate of return recommended
by the Treasury Board Secretariat of the Government of Canada as a central value for benefit/cost analysis. The
estimate is conservative since more recent literature suggests a lower percentage (more favourable in this case)
social rate of return for Canada.
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3.3
Market Overestimation of Costs of Brownfield Redevelopment
One of the efficiencies of a market economy is that, when it works well, private sector
perceptions of cost and the actual cost of resources to society are close to the same. In the case
of brownfields, there are several inter-related market failures that result in private sector
redevelopers perceiving and/or experiencing higher costs than are true and/or necessary.18
Those market failures are reviewed here under the following headings:
•
•
•
•
•
•
•
•
Civil Risk
Regulatory Risk
Information Asymmetries
Insurance Market Failure
Lack of Access to Capital
Regulatory delay
Economies of Scale in Institutional Development
Tax System Impediments
Solving or mitigating these sources of market failure will increase rate of redevelopment for Tier
2 brownfields, with consequent economic, social, and environment benefits.
3.3.1 Civil Risk
Distinguishing Real Costs from Market Failure
Redevelopment of brownfields involves risks of future liability from the contaminants in the land
resulting from past use. Although remediation can be undertaken to control contaminants or
reduce them to acceptable levels – this does not end the risk. Levels of control that are
acceptable now may be found to be not acceptable in the future. Elements in the soil that are not
considered toxic now may be found to be toxic in the future. Damage to the health of others,
and to the loss of use or enjoyment of surrounding land may give rise to future claims for
damages.
These considerations represent real costs and are not market failures in themselves. On average,
these risks will materialize in the future for some redeveloped brownfields in actual claims. In
conditions of uncertainty, redevelopers will consider the expected value of such risks for any
brownfield. This expected value is part of the real cost of redeveloping brownfield land, and will
be incorporated in the price the redeveloper is willing to offer for the brownfield land. On the
other hand, owning undeveloped brownfield land also involves these risks for the current
landowner. The risks to the current landowner may be higher since the contaminants have not
received the remediation that would come with redevelopment. Thus the price the current
landowner is willing to accept to sell or convert from current use is also lower to reflect the
financial implications of this ongoing risk.19 Through the interaction of the landowner and
18
“Experiencing higher costs” is meant in the broadest sense, including the cost of equity capital. Higher perceived
project risks, for example, may cause redevelopers to place a higher price on the availability of their own capital to
projects: they will require higher expected rates of return before undertaking a project.
19
Other considerations include the ongoing cost of policing and monitoring, especially in the case of urban land that
is unused.
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potential buyers, the market will take into account the relative benefit of remediation against any
increased risk that would result from increased utilization of the land after remediation and
redevelopment.
While far from perfect – since it relies on an effective and accessible legal system for processing
damage claims - this market process is capturing a real cost. The cost may represent a barrier to
redevelopment of brownfields, but that barrier is a real cost that should be considered by society
in any redevelopment decision. The fact that it is considered is not in itself a market failure, but
a market efficiency.
Civil Liability & Market Failure
However, there are features of current Canadian civil law that may cause the expected value of
civil risk to be double counted (or more) in redevelopment decisions:
•
•
•
Liability is joint and several. All parties involved in a successful claim are jointly
responsible for settlement. If one cannot pay, the others must, regardless of the size of
their actual role. Any one party may potentially be required to bear the whole cost of a
claim. A contractor who did only one part of the job of remediation may become wholly
liable for the claim. A bank that came into possession of a property through loan default
may also become wholly liable for the claim.
Class of defendants is extensive. Anyone related to the redevelopment project can be
sued – the seller of the land, the developer, the banker, consultant, and building
authorities may all be subject to liabilities. In combination with joint and several
liability, this means that a small contractor who did only one part of job of remediation
may become liable for the whole of a claim.
No effective time limit to claims. Although there is a time limit to civil claims, the
clock does not start ticking until the damage motivating the claim is discovered or
discoverable. Since the post-remediation risks include the risk of new discoveries of
health risks, or future discoveries of a causal relationship of a problem to the
contaminants of the brownfield, the effective liability goes on forever.
The net effect is that anyone who becomes involved with a brownfield redevelopment is
potentially and endlessly liable for future claims arising from the effects of contaminants on the
property, even after remediation. This liability cannot be escaped through the sale of the land or
the project, since the joint and several provisions extend through the chain of those involved
back to the original participants.
In the naïve case, each party (the landowner, the redeveloper, the remediation firms etc.) would
count the full value of the expected claim as their own – leading to double-counting the cost as
the returns of the project would have to cover the expected liability one time for each
participants. In reality there are private contractual mechanisms to overcome this problem when
the numbers of parties involved are small, and the time scale limited.
For example, a
landowner may sell the land and include assumption of the cost of claims as a condition of sale.
Parties involved in redevelopment may also contract among themselves to apportion shares of
responsibility for paying future claims.
The contractual arrangements to overcome these problems rely on the parties knowing each
other, and having confidence in the capital depth of each party to bear their share of the liability.
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If the numbers of parties involved are too large, the contracting costs and knowledge
requirements become infeasible. If the time frame is too long, the risk that the financial position
of parties may change becomes too great.
In the case of brownfields, private contractual arrangements are very limited in their ability to
mitigate the problem. Because there is no time limit to claims, and claims may be pursued back
through the chain of title, any complete arrangement must involve all parties in both the present
and future, and all parties must receive assurance that the parties allocated shares of liability will
remain sufficiently solvent in perpetuity. This is clearly not feasible.
Thus, while contractual mechanisms can address a portion of the issues created by joint and
several liability, it is inevitable that the parties involved will collectively over count the expected
value of future claims. This will manifest itself partly in the lower prices any future user or
buyer of a completed brownfield redevelopment will be willing to pay.
Alternative private
mechanisms for coping with this issue – such as insurance – are also problematic and are
discussed further below.
3.3.2 Regulatory Risk
Brownfield redevelopment will usually include an environmental assessment to identify
contaminants, and then remediation to meet the requirements of federal and provincial
environment laws and regulations. Developers would prefer that after completing this phase, at
whatever cost, the matter of compliance would be settled. It is not.
Developers, and later owners of the site, must account for the ongoing risk of new expenses to
meet regulatory requirements. These requirements may occur because of
•
•
•
the discovery of new contaminants on the land not identified in the original assessment;
or
the introduction of changes to regulations, perhaps in response to new scientific
discoveries or a shift in public policy; or
a shift in the interpretation of regulations by government agencies responsible for
enforcement.
Since environmental laws typically follow the same principle of joint and several liability,
regulatory risk parallels civil risk in its unending time frame and multiple parties. As a result,
the same problem of over counting the cost of the risk occurs, resulting in a net overestimation of
costs of redevelopment, and sub-optimal brownfield redevelopment.
The impact of regulatory risk on expected costs of redevelopers is arguably greater than civil
risk. In the case of civil risk, there are the twin deterrents of the cost of pursuing a claim by the
damaged parties, and the burden of proof of causality between the contaminants and damaged
experienced. Governments are not deterred by the cost of court actions (they can be relentless),
need only prove that contamination exists (rather than proving causation), and can include the
right to issue peremptory orders in their regulatory powers under the environmental legislation.
A key example of the unintended chill that government regulation can put on brownfield
remediation and redevelopment is the U.S. federal government’s Comprehensive Environmental
Response, Compensation, and Liability Act (CERCLA), better known as the Superfund. Enacted
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in 1980, CERCLA was designed to ensure that the worst contaminated U.S. sites were cleaned
up, and to avoid endless delay such as that which occurred in previous national environmental
scandals, such as Love Canal. CERCLA empowered the Environmental Protection Agency
(EPA), to respond directly to release of hazardous substances, including contaminated sites, and
to recover the costs afterwards from those deemed liable (including the principle of joint and
several liability). Further, the financing was provided to make the EPA’s Superfund actions
credible and vigorous. A separate trust fund was established, funded by an earmarked tax on the
chemical and petroleum industries.
While CERCLA’s immediate intention was to fund and ensure the clean-up of seriously
contaminated sites (e.g. Tier 3 sites in the context of this paper), it is also widely felt that the
increased regulatory risk deterred potential developers from redeveloping more feasible sites
(e.g. Tier 2 sites).
While data is lacking on U.S. performance on Tier 2 sites (sites not
identified by the EPA as being on the national priority list), much of the recent innovation in
U.S. EPA brownfields programs are an attempt to respond to this perceived failure.
3.3.3 Information Asymmetries
When buyers know more than sellers about environmental risks of land, problems of adverse
selection are introduced. Similar to the market for used cars, some exchanges of land that should
take place do not because buyers cannot fully trust sellers and lower their offering prices
accordingly.20 The problem is compounded by unwillingness of sellers to permit their land to be
environmentally assessed. Discovery of contamination may trigger regulatory requirements for
costly clean-up, without assurance that the buyer would remain interested.
3.3.4 Insurance Market Failure
Another efficiency of markets is the ability to diversify risk. When a single individual or group
must bear the entire risk of a project, the rate of return the individuals require to undertake the
project increases the greater the size of the risk relative to their net worth. Individuals require a
personal risk premium to persuade them to risk large portions of their own wealth on a single
project. When individuals are able to share the risk through the market place, such as through
the purchase of insurance, then the required rate of return will be lower, reflecting only the risk
inherent in the project itself.21
20
Because buyers know that sellers may know more about the history of past use of a parcel of land, they assume
that the best parcels of land will be held out of the market and developed by the owners themselves. This means that
the average risk associated with brownfields offered for sale may be expected to be higher than the average risk for
all brownfield properties. Knowing this, potential buyers/redevelopers offer lower prices for land than they would
otherwise. This behaviour is reinforced by sellers who, knowing that prices are lower than they could be, will
withhold better quality land from the market until they can develop it themselves or find a more knowledgeable
buyer. This delays brownfield redevelopment, and may result in brownfields being redeveloped for uses that are
less wealth-creating than the ones that would occur with full sharing of information.
21
More precisely, the minimum expected rate of return will be the risk-free rate of return plus a “market-risk”
premium based on the covariance of project returns with overall market returns (sometimes termed the beta
coefficient in investment literature).
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22
In the case of brownfields, the ability to diversify risk through insurance is limited. Insurance
products are available in Canada, but at a high cost and with important limits to coverage.
Insurance products are available in these categories:
•
•
•
Clean-up Cost Caps. Cover costs of remediation in excess of specified levels for a
project.
Pollution Insurance. Typically covers post-remediation civil and regulatory risk.
Secured Creditor Policies. Covers creditors for above risks, particularly when the
creditor assumes control of the property as a result of default.
These products provide some opportunity for relief from civil and regulatory risk, but offer
coverage for only fixed time periods. As discussed above, the time period of risk exposure is
infinite for all parties involved, including those who have sold or exited from the project. For
reasons also discussed above, the number of potential persons needing coverage is large and
grows over time, making the sharing of one policy among all parties contractually expensive and
perhaps infeasible.
The high costs result from the other market failures above. Regulatory risk in particular imposes
a government-created risk that must be incorporated into the insurance premium. The large
number of potential parties to litigation also imposes high transaction costs in the event of
claims. There are also these exacerbating factors:23
•
•
•
Adverse Selection. A well-known phenomenon in insurance markets is that once
insurance becomes expensive, the lower-risk potential buyers drop out of the insurance
pool, raising the cost of coverage further for the remainder. In the worst case, the market
for a particular insurance can collapse entirely as more people drop out at higher and
higher prices.
Lack of Scale at the Industry Level. The nature of the risk to be insured varies not
only by project, but also by jurisdiction. The environment assessment and regulatory
regimes vary by province, and may lack standardized procedures within given regimes.
As a result, most pollution insurance policies must be hand-written for each project –
raising the costs of the insurance considerably. Standardized insurance forms for these
products are not available, nor is there sufficient common cases within given jurisdictions
for insurance companies to define experience pools from which to statistically assess risk.
The fixed cost of drafting policies also makes them infeasible for smaller projects, such
as the redevelopment of former gas station locations. The higher costs contribute further
to the adverse selection problem. In the absence of other problems, and with greater
standardization of government regulatory regimes, it is likely that the scale of brownfield
insurance markets would increase and the cost of insurance would drop accordingly.
Government failure as an insurance buyer. A further contributor to the lack of scale
in brownfield insurance is the low participation rate by municipal and regional
governments as brownfield insurance buyers. Local and regional governments often
22
The ability to diversity risk through ownership is also limited. The real-estate development industry in general
involves a highly diverse product, as the specifics of each development project vary substantially. As a result, the
information costs for diversification of projects through the stock market tend to be too high except for very large
projects, and ownership of development firms tends to be concentrated.
23
For a full discussion of insurance issues in the U.S. context see Meyer, various years, in the bibliography of this
paper.
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become the residual holders of brownfields as their original owners abandon them, or as
they are acquired through default on taxes. However, governments tend towards selfinsurance, and/or locate their insurance purchasing decisions in branches separate from
the economic development branches that address brownfield management issues.24
A further consideration, not discussed in the literature, is the form in which insurance takes
place. The insurance products listed above represent one form of coverage. However, our
society also deals with insurance through professional insurance of engineers, architects, etc.
Each bridge that is built has unique features, but insurance costs are not a significant barrier to
bridge building as there is a well-functioning insurance market for professional engineering and
architecture firms.
3.3.5 Lack of Access to Capital
A further consequence of civil risk and regulatory risk is lack of access to capital to fund
brownfield redevelopment projects. Lenders are reluctant to involve themselves in projects that
may create these ongoing liabilities for them in perpetuity, especially as they can acquire only
limited insurance to cover themselves. The usual step in acquiring financing for real estate, the
mortgage of the land, is also problematic. The value brownfields as collateral is limited. Banks
will be reluctant to take possession in the event of default since even temporary ownership will
expose them fully to the civil and regulatory liabilities from the contaminated land.
When capital cannot be borrowed, it must be provided in equity form. Even where potential
investors command the required resources themselves, the higher level of financial commitment
means a greater proportion of the investors’ wealth is at stake, and a greater rate of return will be
required of the project before it will be considered attractive.25 This in turn means fewer
brownfields redeveloped than would be the case if capital markets were more accessible.
Lack of access to capital is particularly difficult during the initial stages of a brownfield
development, before the environmental assessment is complete and the level of risks better
understood.
3.3.6 Regulatory Delays
Governments themselves create additional risks to investors through undue delay in regulatory
processes.
Where environmental regulation is slow and cumbersome, the necessary
environmental assessments may take years, tying up developer resources and initiative and
increasing the cost of the redevelopment.
This problem also extends to government programs to help redevelop brownfields. For example,
the U.S. EPA recently instituted attractive special tax provisions allowing expensing of clean-up
costs for qualifying sites over a three year period. Out of an estimated 30,000 qualifying sites,
only a couple of dozen applied. Process delays, including linking with qualifying provisions of
other government programs, were one reason suggested for the low uptake.26 U.S. State
24
See Meyer & Yount (1999) for discussion of public authority participation in brownfield insurance markets.
See also discussion of diversification in the discussion of insurance market failure.
26
U.S. House of Representatives. (2000) The Reality Behind the Rhetoric: The Failures of EPA’s Brownfields
Initiative
25
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brownfield programs also appear to receive higher investor interest when processes include
legislated time limits.27
3.3.7 Stigma and Risk Perception
The ability of developers to turn their projects over to final users may be limited by an
exaggerated public perception of risk associated with remediated brownfields. Residential
redevelopments may be particularly vulnerable.28
3.3.8 Industry-Wide Economies of Scale in Institutional Development
The decision of each developer over potential projects does not take into account the collective
impact of increased brownfield development by everyone on costs of remediation to the industry
as a whole. Remediation becomes cheaper as the volume of projects collectively carried out by
redevelopers increases. Ideally, higher industry volume leads to the development of professions
and specialist firms who lower costs. In turn, the existence of new professions improves the
ability to provide standardized environmental insurance products, permitting even lower costs
through the diversification of risk. The burden of insurance may also shift from specialized
brownfield insurance products to more general forms of professional insurance, such as that
carried by engineers and architects.
Further economies of scale may be realized where governments standardize their environmental
assessment and regulatory regimes to permit more common approaches to assessment and more
standardized insurance products.
3.3.9 Tax System Impediments
An impediment may be defined as a feature of the tax system that is causing inefficient
behaviour, in this case with respect to brownfield redevelopment. Correcting it involves
structural change to the system and may not necessarily involve reduced tax revenue or
expenditure.
Deductibility of Remediation Expenses
A key example is the treatment of remediation expenses. Owners of Canadian brownfields may
treat remediation expenses as a cost, tax deductible in the year incurred. However, redevelopers
of brownfields must capitalize the expense as part of their improvements to the land, and then
spread the deduction of the expense over many years. The same expenditure receives two
different treatments depending on who carries it out.
This dual treatment is not unusual in the tax system since it reflects the different nature of the
business of land owning versus land developing. However, in the case of brownfields it has
special impact. Since the landowner receives the more favourable tax the onus is on them to
undertake remediation of contaminants on the land. However, such remediation must be
preceded by environmental assessment to identify the contaminants. Landowners are unlikely to
undertake such assessments in the absence of a sealed deal on redevelopment, since, as noted
27
28
ICF Consulting and E.P. Systems Group (1999)
See discussion of stigma and impact on property values in Section 3.1 of this paper.
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above, the confirmation of contaminants could trigger regulatory requirements for clean-up.
Thus, the landowners cannot be expected to undertake the expense – shifting the burden to the
redeveloper. However, the redeveloper faces a market failure in access to capital (discussed
above), particularly in the early remediation phases of a project. The forced deferral of tax
deduction to future years compounds the impact of capital market failure by cutting into cash
available in the early phases. The result is a further disincentive to undertake brownfield
redevelopment.
Federal and Provincial Liens
Brownfields are more likely than other sites to be abandoned by their owners or surrendered to
the municipalities through default on taxes. Municipalities then seek buyers for the land.
However, federal and provincial liens on the brownfield land survive bankruptcy and tax sale.
Any new owner must pay them.
For some brownfield sites this will mean that a new
owner/redeveloper cannot be found, leaving the lien unpaid and the land un-restored. For these
cases, perpetuating the lien is inefficient, since it blocks redevelopment while not generating any
revenue recovery for the government.
4
KEY FEATURES OF AN EFFECTIVE BROWNFIELDS STRATEGY
The preceding analysis permits identification of two key features of an effective brownfields
redevelopment strategy.
29
•
Strategic measures should address both risk and financial incentives.
While a
variety of significant market failures have occurred as result of the current frameworks
for civil and regulatory risk, correcting these alone would not achieve full realization of
the benefits available from redevelopment of Tier 2 land. The value of third party wealth
creation would still not be included in the decisions of private sector redevelopers.
Available literature suggests that the magnitude of these benefits is significant. Impact
on neighbouring property values captures only part of this wealth creation, yet it has been
estimated by various studies as on the order of 10% for commercial property and 30% for
residential. One study estimated the ratio of property value benefits to remediation costs
as in excess of 13 to one.29 To introduce this factor into private decision-making, some
form of financial incentives is needed. Text box 4.1 illustrates this point.
•
Project-by-project assessments required. To effectively deliver financial incentives,
whether as low-interest loans or outright grants, a strategy will require components that
assess the need for incentives on a project-by-project basis. The alternatives, such as
broad rules-based tax credits have two drawbacks if used exclusively:
o Dilution by Tier 1 lands. It is difficult to establish simple rules that will
automatically distinguish between Tier 1 lands and Tier 2 lands. Tier 1 lands
would be developed with or without assistance, so financial assistance for
them increases the cost to the public purse without adding any additional
brownfield redevelopment.
o Excessive redistribution. It can be shown that, in general, a fixed subsidy
applied to all brownfields that is big enough to make redevelopment of all
See Section 3.1 of this document.
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Tier 2 land profitable to the private sector, will also tend to be at least as large
as the net additional wealth available to society from Tier 2 land. Thus, a
blanket subsidy under a fixed rule is either too small to achieve the desired
result, or risks transferring all the benefits to developers, while saddling the
public with both the cost of the subsidy and the cost of administering the
program.
In brief, transfers to Tier 1 lands as well as Tier 2 will dilute the effectiveness fixed rules;
and there is a risk of transferring the entire social benefit of redevelopment to the
redeveloper, at the expense and administrative cost borne by the taxpayer.
Text Box 4.1: Need for Instruments to Address both Cost and Benefits Related Market Failures
Building on Text Box 2.1, the figure below shows that addressing cost-related market failures alone is not
enough to realize all the opportunities represented by Tier 2. At best, resolving risk issues and other costbased market failures would lower developer costs to the dotted line, “Costs without Market Failure”.
Private sector developers would then expand development of brownfields to point D only.
The addition of financial incentives to reflect positive impacts on third parties could raise perceived
benefits as high as the dotted line “Commercial Benefits – All Parties”. Combined with the earlier
measures addressing risk, the point where costs exceeded benefits for developers would be defined by
point B. Point B represents full development of brownfields whose income generation impacts exceeds
costs (Tier 2).
$/Hectare
Cost to Developer
C Cost Without Market Failures
Combined Commercial
and Social Benefits
B
A
Commercial Benefits
All Parties
Risk Controls Alone
Risk Control & Incentives
Tier 2
Commercial Benefits
To Developer
Brownfield Hectares
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5
RANKING EFFECTIVENESS OF INDIVIDUAL POLICY INSTRUMENTS
Policy instruments available to serve a brownfield redevelopment strategy may be divided into
these broad categories:30
•
•
•
•
•
•
•
•
Tax Reform/Incentives.
Direct Financial Assistance.
Capital Market Interventions.
Civil Law Reform.
Regulation.
Information.
Institutional Development.
Direct Redevelopment by Government.
Within each of these categories there are many variations. This section discusses the common
variations, identifies the most relevant market failures they address, and ranks their individual
effectiveness as High, Medium or Low. Where relevant, results of a preliminary review of
available literature on Canadian and U.S. experience are reported. Findings are summarized in a
table at the end of each sub-section. The instruments recommended in the NRTEE brownfields
strategy are indicated in the Policy Instrument column by recommendation number. A
consolidated table is provided in Appendix B.
Effectiveness is rated on a qualified basis for the best-case application. For example, if applied
indiscriminately, many instruments would result in giving public support to Tier 1 lands, land
which would have been redeveloped with or without government intervention.
Thus,
effectiveness ratings for some instruments are qualified for the case where there is effective
project-by-project screening to focus on Tier 2 lands, and that project assessments operate on the
philosophy of providing only what is needed to make a project viable and attractive for
redevelopment.
5.1
Tax Reform/Incentives
Features of the tax system that are impediments to brownfield development may be corrected or
modified. Additionally, financial incentives such as tax credits may be delivered through the tax
system.
Two impediments in the Canadian tax system were identified in Section 3 of this paper,
deductible remediation expenses and tax liens.
30
The focus is on intervention approaches, rather than on methods of financing those interventions. Not within the
scope of this paper is the variety of innovative methods of raising funds to support brownfield redevelopment
strategies. These range from simply accessing available economic development funds for urban areas to more
elaborate approaches. For example, tax-increment financing is an approach where incremental property tax
revenues generated by redevelopment are pledged to support a bond issue or other financial instrument.
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Allowing Deductibility of Remediation Expenses
Redevelopers would be allowed to deduct remediation expenses in the year they are incurred,
addressing the impediment discussed in Section 3 of this paper. This is potentially highly costeffective since it only involves deferring tax revenue rather than reducing it.31 However, there is
a need for controls to avoid abuse – for example, one would not want every excavation by a
developer to be treated as remediation soil removal.
U.S. experience suggests that eligibility rules need to be simple for this program to work. As
noted in Section 3.3.6 above, the U.S. EPA experienced a low uptake of its program for threeyear expensing of clean-up costs, partly due to procedural delays.
Possible simple rules could include the requirement eligible costs be associated with an
environmental assessment, or a limit on the percentage of total redevelopment expenses that may
be deducted with respect to a given property.
Tax forgiveness
Historical taxes owing on lands, such as federal liens, may be forgiven. In appropriate cases,
such forgiveness costs nothing, since the lien is not collectable if no one is willing to take
ownership of the land. The disadvantage is that this cannot be applied effectively on a rules
basis – it must be incorporated into a project-by-project assessment.
Tax credits
Beyond the removal of impediments, the tax system may be used as a delivery mechanism for
the financial incentives needed to fully realize Tier 2 redevelopment opportunities (see Section
4). An advantage of delivering assistance through the tax system is that it enables a rules-based
approach that creates an entitlement that redevelopers can count on, without concern over
bureaucratic approval processes or delays. For example, a tax credit on remediation expenses
might reduce taxes payable by an amount equal to that spent on brownfield remediation. The
disadvantage of a rules-based approach like a tax-credit is the difficulty in constructing a rule
that discriminates between Tier 1, Tier 2, and Tier 3 brownfields. Canada’s previous history on
tax credits, such as the former Research & Development tax credit, indicates how the cost of a
program may get out of hand by being applied to too wide a set of claimants.
Tax credits are used by a number of U.S. states.32 Massachusetts has a five percent state
investment tax credit. The program is not specific to brownfields, but covers designated areas
heavy in brownfields. Ohio gives the lesser of ten percent of clean-up costs or $500K. Ohio’s
program is also limited by area and requires participation in the state’s Voluntary Cleanup
Program – effectively screening on a project-by-project basis.
31
32
There is still some cost since it increases government financing requirements.
IFC Consulting (1999).
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Pre-qualification of Land
One potential remedy would be to establish a national registry of land pre-qualified for eligibility
as Tier 2 brownfield land (the process would have to exclude Tier 1 and Tier 3). A pre-qualified
list of land would restrict the risks of excessive tax credits. It would also allow drawing a
distinction between historical pollution (occurring from land-use prior to environmental
legislation) and on-going pollution. Historically polluted land for which there has been little
interest in redeveloping could be treated separately, also avoiding undermining the principle of
polluter-pays. This approach would also permit improved targeting and effectiveness of other
policy instruments. The qualification of land could also be limited in quantity, permitting a
regional balance in eligible land according to provincial allocations within the federal tax system.
With pre-qualified land, or a similar rules-based restrictive mechanism, the effectiveness of tax
credits would be high. Without a fixed base, established in advance by clear rules, effectiveness
would be low.
The major U.S. example of pre-qualified land is the EPA’s National Priority List of land for
clean-up under the Superfund. However, this list targets the worst-case polluted land (Tier 3)
and is opposite in intent to identification of Tier 2 lands. Landowners would prefer not to be on
the National Priority List, even though it offers eligibility for some federal assistance, due to the
aggressive/punitive consequences of the Superfund legislation.
Quebec’s Revi-Sols program has been relatively successful in achieving a quick start in enrolled
brownfields project. Part of this success has been credited to the advance identification of
brownfield land by the City of Montreal: "The rapid pace at which the funds were used in
Montreal is explained partly by the fact that the city was ready and had made the effort to
characterize several of the properties it owned, which allowed it to submit applications right at
the start of the program".33
Tax Abatements
Available tax abatement instruments include abatements of property taxes, development charges,
planning fees, etc. Tax abatements are typically a municipal level tool to influence land
development. These have the potential to be highly effective if applied selectively on a projectby-project basis
Abatements and forgiveness of various forms are widely used by U.S. states on a project-byproject basis as part of their Voluntary Cleanup Programs.34 Wisconsin, for example, removes
tax arrears from brownfield sites so as to make them more commercially attractive.35
33
M. Beaulieu (2002)
See the EPA’s Voluntary Cleanup Programs web-site at http://www.epa.gov/superfund/states/stsi/vol.htm
35
Bartsch, Charles (2001). “Brownfields Financing Basics: Making the Numbers Add Up.” Presented at the
Brownfields 2001 Conference, Chicago, IL, September 24, 2001. (Deck) Washington: Northeast Midwest Institute.
34
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Table 5.1: Effectiveness of Tax Reforms/Incentives
Policy Instrument
Deductible Remediation Expenses. (NRTEE
Rec 1.1) Allows redevelopers to deduct
remediation costs as a current expense, rather
than capitalizing as part of redevelopment
costs. The tax benefit is moved to the year the
expense is made, rather than spread over
future years.
Tax Credits. Providing $ through tax
reductions matching expenditures on
remediation of brownfields.
Abatements. Includes abatements of property
taxes, development charges, planning fees, etc.
Tax Forgiveness. (NRTEE Rec 1.2) Historical
taxes owing on lands, such as federal liens,
may be forgiven.
5.2
Most Relevant
Market Failures
Tax system
impediments
Effectiveness for Redevelopment of
Tier 2 Brownfields
High - when combined with simple rules to limit
abuse – such as a percentage cap on share of
expenses, or professional certification of
requirements.
Third party wealth
impacts
Low-Medium. If unrestricted, credits could go to
Tier 1 sites
High. If restricted to land pre-qualified as Tier 2,
and for historical pollution only.
High. If applied on a project specific as-needed
basis.
Infrastructure,
transportation, and
municipal services
cost savings.
Tax system
impediments
High. If applied on a project specific as-needed
basis. Liens may be worthless if land not
redeveloped. Application limited to where liens
exist.
Direct Financial Assistance
Grants or equivalent financial support may be delivered directly, usually on a project-by-project
basis. As discussed in Section 4, the project-by-project approach is important to avoid diluting
the impact of funds with Tier 1 or Tier 3 land, and to provide only sufficient funds to make the
redevelopment project attractive.
Grants for Remediation
Grants may be given to assist site assessment and remediation. One advantage of this instrument
is that it targets grant money at early stages of a project, where access to capital is the most
restricted. It also lowers the initial barriers for private redevelopers to carry out feasibility
assessments, and limits assistance to activities that should likely be required in any event. The
assessment phase alone reduces information asymmetries, so that the status of the land is shared
and known. Combined with remediation, the result is to help level the playing field between
greenfields and brownfields for municipal growth.
Québec’s Revi-Sol program shares cost of site assessment and remediation of bona-fide
redevelopment projects. It has had strong participation within the province.
U.S. experience suggests that grants for remediation may not be very attractive for brownfield
owners unless linked with broader programs. EPA Assessment Grants support inventorying,
assessment, and planning, and clean-up related to brownfield sites. Since its inception, the
EPA’s Brownfields Program claims it has contributed over $280 million in pilots and grants.
However, U.S. Office of the Inspector General found in 2000 that most of the funds transferred
or committed to local programs had either not be been spent or been spent on activities other
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than remediation. “In the (program’s) limited history, four pilots have issued five loans and only
one clean-up has been completed.”36
Grants are also used by many states, but only as small adjuncts to other programs. Overall,
within the scale of U.S. resourcing, grants are not a significant part of state programs (ICF
Consulting, 1999).
Grants for Redevelopment Projects
Grants may also be given to assist redevelopment projects more broadly. Here, the project-byproject screening is very important in order to screen out Tier 1 and Tier 3 brownfields.
Without such screening, there is the risk that public funds could be unwittingly provided to Tier
1 brownfields, the ones that would have been redeveloped anyways. This risk is great since the
definition of brownfield is potentially quite loose. Virtually all urban land has been polluted to
some degree by prior use. A useful threshold for grant awards is to consider the direct
infrastructure savings generated for the municipality by the use of brownfields over greenfields
(See Section 3.1).
The U.S. Department of Housing and Urban Development (HUD)’s Brownfield Economic
Development Initiative (BEDI) grants are more flexible than EPA grants. They can be used for
all phases from clean-up to construction, including redevelopment of petroleum sites. $25
million in grants was available for fiscal year 2001.37 BEDI grants have been used successfully
in Camden, NJ, Montgomery County, Pennsylvania, Syracuse, New York, and Lorain, Ohio.38
Table 5.2: Effectiveness of Direct Financial Assistance
Policy Instrument
Grants -Assessment/Clean-up. (NRTEE Rec
1.5) Money given to support site assessment
and remediation.
Grants – Project Support. (NRTEE Rec 1.5)
Money given directly to support a project either
through grants, free services, etc.
Most Relevant
Market Failures
Information
asymmetry
Capital market failures
Third party wealth
impacts
Third party wealth
impacts
Infrastructure,
transportation, and
municipal services
cost savings
36
Office of the Auditor General (2000), pg. ii.
Spergel (2001)
38
Bartsch (2002)
37
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Effectiveness for Redevelopment of
Tier 2 Brownfields
High. If applied on a project-specific basis. Levels
playing field with greenfields and delivers funds at
early stage where external capital less available.
Medium. If applied on project specific as-needed
basis. Potential for excessive funding, and
inadvertent funding of Tier1 or Tier 3.
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5.3
Capital Market Interventions
Capital market imperfections can be addressed directly through revolving loan funds and other
instruments; or indirectly through provision of services such as loan insurance, or other forms of
liability insurance.
Assumption of Liability
One way of correcting capital market failure is to attack it at its root: the joint and several
liability for civil claims and regulatory orders (See Section 3.3).
Private contractual
mechanisms exist to bypass this problem, but face difficulties such as the need to rely on
solvency of parties over time. If government takes on the liability through a contacting process,
either through the sale of land or by acting as insurer, then lenders may feel this problem is
addressed.
While elegant in concept, this policy instrument has high risks in execution. Governments are
typically not experienced in administration of these kinds of risks, even when they reinsure with
private insurance companies.39 There is the risk that providing these guarantees will initially be
regarded as “free”, until the mounting liability becomes noted by credit markets and the cost of
borrowing begins to rise.
Remediation & Project Loans
Another way of addressing capital market failure is for government to lend money. Remediation
loans are the most limited and targeted approach – money is lent for the purposes of assessment
and remediation. This delivers capital to a project at early stages, where market access to capital
is the most problematic. As with remediation grants, an issue in program design is ensuring a
reasonable uptake rate by eligible parties through simple and quick processing, and linking with
a broader package of assessment and assistance.
Loans may also be provided for redevelopment projects as a whole. In this event there is a
stronger requirement to screen projects to target Tier 2 brownfields. However, the consequences
of poor screening are of less concern than with grants, as long as projects are screened for
solvency so that there is a reasonable expectation of loans being repaid.
Under the Brownfields Cleanup Revolving Loan Fund (BCRLF), the U.S. EPA offers loans in
partnership with state and local agencies. These cover clean-up costs exceeding the appraised
value on which the borrower's primary financing is based.40 Similar programs are offered by
Delaware, New Jersey, Minnesota, Ohio and other jurisdictions, often linked to broader regional
economic development programs.
Loan Guarantees
A more indirect method of solving capital market access is to provide loan guarantees.
39
Meyer & Yount (1999)
See
the
EPA
Brownfields
http://www.epa.gov/swerosps/bf/rlflst.htm
40
Cleanup
Revolving
Hara Associates
Loan
Fund
Pilots
web-site
at
26
Depending on the specific provision for co-insurance, this can place responsibility for
discriminating between high and low risk projects on the banks and other lending institutions,
who may be more efficient at this than government.
The effectiveness of loan guarantees rests on the efficiency of government administrators in
acting as loan officers, or designing appropriate co-insurance structures to ensure that the actual
lenders do not lose their incentives for discriminating properly between the commercial risks of
alternative projects. As with the assumption of liability, governments do not typically have the
invested institutional skills to be good managers of risk. A possible exception for Canada is the
government-owned Canada Mortgage and Housing Corporation (CMHC), discussed below under
mortgage insurance.
The U.S. Small Business Administration 7(a) Loan Guarantee Program provides guarantees of
up to $1 million for environmental clean-up projects. Numerous states, including Florida and
Oregon, also offer loan guarantees to help promote brownfield redevelopment, but on a limited
basis. The Oregon program is limited to clean-up costs.41 The Florida program is more general,
but guarantees only 10% of the loan.42
Mortgage Insurance
Mortgage insurance is a specific form of loan guarantee that may be offered to real estate
projects for a fee. It is a common financial instrument available from the private financial sector
that allows lenders to spread some of their risk, especially on larger projects. The relevant
property is pledged as collateral. If the loan defaults, the insurer pays the lender and may take
over the pledged property to try to recover the cost.
In the case of brownfields, the offering of mortgage insurance would remove much of the
concern that lenders have over civil and regulatory risk, since the risk would be transferred to the
insurer. However, for these same reasons, private mortgage insurers are reluctant to insure
brownfield projects. A potential role for government is to step into the place of private
mortgage insurers.
The drawbacks to brownfield mortgage insurance by government are the same as for other
mortgage guarantees discussed above. The chief challenge is having the necessary institutional
skills. Beyond the EPA clean-up loans, in the literature reviewed by this study there was no
evidence available to suggest that public mortgage insurance is used as a brownfield intervention
tool in the United States.
Canada however, has the federally owned CMHC, whose main activities include mortgage
insurance in both residential and commercial markets. The CMHC is uniquely situated to correct
capital market imperfections in lending to brownfields. A major disincentive for lenders is the
“regulatory risk”, the risk of retroactive future clean-up requirements by government. Lenders
will experience this risk if they acquire the property through default on the mortgage. Mortgage
insurers can take this risk off the lenders’ hands, but then face the same problem themselves. As
a government agency itself, the CMHC can take a more risk-neutral approach to assessing
41
See the State of Oregon Loan Guarantee web-site at http://www.econ.state.or.us/businessfinance/loanguar.htm
State of Florida (2002). See also
http://www.dep.state.fl.us/waste/quick_topics/publications/wc/brownfields/Incentives/loanproc.pdf
42
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mortgage re-insurance, since it is would effectively be taking back into government a risk
created by government. While CMHC mortgage insurance is intended to be self-financing, the
ultimate backing of government places it in a better position to acquire this kind of risk, and to
offer mortgage re-insurance at rates reflective of greater risk-neutrality.43
Lender liability limits
Another approach to breaking the link between civil and regulatory risk and capital market
failure is to remove or reduce the liability of lenders. As discussed in Section 3.3, the joint and
several provisions of current liability law in Canada render a lender vulnerable to being entirely
responsible for claims on a project, especially if they acquire an ownership role in property
through default on a loan.
The legal structure might therefore be altered so that lenders, especially those who assume
control of land after mortgage defaults, are protected from regulatory and/or civil liability from
pollution and clean-up requirements.
Such provisions can be effective in increasing the willingness of lenders to finance brownfield
redevelopment projects. However, the question of limiting regulatory risk should be considered
separately from limitations on risk for civil claims. Alteration to the common law provisions for
civil liability may have significant consequences in the strategic behaviour of others that can
even lead to increased pollution (see discussion under civil law reform below). Limitations on
civil claims are also potentially redistribute income significantly from potential claimants (such
as people suffering long term illnesses from environmental poisoning) and the parties that would
otherwise be held liable.
U.S. federal and state programs often offer lenders relief from regulatory clean-up requirements.
For example U.S. EPA’s CERCLA (Superfund) limits liability of “innocent landowners” such as
lenders who take possession of collateral. However, U.S. programs typically do not address civil
liability that may be borne by such lenders.
The Canadian federal government is currently considering similar forms of lender protection for
lenders to nuclear power generation facilities in order to overcome similar lender concerns about
joint and several liability for environmental clean-up. These issues have arisen partly out of
provincial efforts to privatize electrical power generation.
5.4
Civil Law Reform
Civil law may be modified to address liability concerns that generate market failure in insurance
and capital markets. The implications of any alteration to the rules of liability established by
common law should be considered carefully, since this is a fundamental framework within which
the private sector operates.
U.S. federal and state programs commonly have provisions to address regulatory risk, but are
silent on civil law and liability. Thus, time limits, proportionate liability, and transferability
provisions in U.S. legislation are intended to reduce the disincentive effects that strong
43
Speaking pragmatically, the CMHC is as vulnerable as any other mortgage insurer to regulatory risk on specific
projects. However, in the event of systematic and arbitrary regulatory action across projects, the CMHC has
avenues for intra-government and inter-government representation that differ from private companies.
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Table 5.3: Effectiveness of Capital Market Interventions
Policy Instrument
Assumption of Liability. Through individual
project agreements, Governments can assume
the liability for future civil and regulatory risk
once given remediation requirements are met.
Remediation Loans. Loans may be for
assessment and remediation (NRTEE Rec 1.4).
Most Relevant
Market Failures
Regulatory & civil risk
Lack of access to
capital
Insurance market
failure.
Lack of access to
capital
Project Loans. (NRTEE Rec 1.4) Through
devices such as revolving funds, low interest
loans may be provided. Funds “revolve,” by
using loan repayments (principal and interest)
to provide new loans.
Loan Guarantees. As an alternative to direct
lending – a portion or all of loans to projects
may be guaranteed.
Lack of access to
capital
Mortgage Insurance. (NRTEE Rec 1.3) A
specific form of loan guarantee where the loan
is secured by the land being redeveloped.
Lack of access to
capital.
Insurance market
failure.
Lender liability limits. Lenders, especially
those who assume control of land after
mortgage defaults, are protected from
regulatory and/or civil liability from pollution and
clean-up requirements. (NRTEE Recs 2.2, 2.3)
Lack of access to
capital.
Regulatory & civil risk.
Lack of access to
capital
Insurance market
failure.
Effectiveness for Redevelopment of
Tier 2 Brownfields
Low. Public institutions do not manage this form of
accumulated risk well. As the accumulated risk
mounts, public cost of borrowing is affected.
High. If applied on a project specific, as-needed
basis, and in combination with other measures.
Access to capital is delivered early in project where
market failure is greatest. However, administrative
costs can be a significant deterrent to applicants if a
stand-alone program.
High. If applied on project-specific, as-needed
basis. The subsidized interest rates provide
modest financial support, while overcoming a key
market failure.
Medium. As with assumption of liability, public
bodies do not manage this form of accumulated risk
well. If a high % of a loan is guaranteed, then one
is effectively making the loan directly with
weakened due diligence. If a low % of loan is
guaranteed, then the impact on the project is weak.
High. In Canada, there is a market making
institution in the form of the CMHC that has the
ability to manage portfolio risk, and ensure
appropriate degrees of coinsurance and precaution
by primary lenders.
High. Removes a major barrier for mortgage
lenders, who might otherwise find themselves full
bearers of civil and regulatory risk in the event of
loan default – removing the value of land as
collateral.
regulatory laws, such as CERCLA (Superfund) have on the desire for redevelopers and lenders
to involve themselves with brownfields.
Time limits
A time limit may be placed on how long someone may be held liable after publicly approved
remediation has taken place. This allows closure of risk at least in terms of time. The quantity
of claims and the double-counting aspects of joint and several liability are not addressed by
fixing time limits.
To carry this out effectively requires the establishment of a framework for registering public
notice on particular parcels of land. The key measure here is alteration or exemption from the
common law governing “discoverability”. To achieve a time limit, the clock must start ticking
at some point whether a claimant has had reasonable opportunity to discover the damage or not.
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As discussed in Section 3.3, a significant cause of market failure for brownfields is the infinite
period under which claims may be made for historic pollution. Without a time limit to risk, new
parties are reluctant to become involved with brownfield projects and it is difficult to arrange
insurance.
Proportionate Liability
Liability can be limited to a party’s role with respect to the source of pollution. In the current
regime a minor player may bear the whole cost of a claim.
The potential effectiveness of proportionate liability is high. It allows new parties, such as
redevelopers to enter picture accountable only for their own actions, not historical acts of others.
It makes risks more knowable and controllable, as each party becomes responsible only for their
own actions. In this context, the lack of time limit on liability would be less of a concern for
brownfield redevelopers.
Transferability of Liability
Parties may pay others to take on the full liability for future claims. For example, a landowner
may pay a redeveloper or a specialist firm in land remediation to assume full risk. This is
possible under private contract law at present. Legislation would make the difference that, if the
receiving party met certain conditions of financial depth, law would protect the transfer of
liability. Subsequently, if the party acquiring liability were unable to pay a claim, the original
holder of the liability would still be free from obligation to pay.
This instrument is potentially very effective in promoting given brownfields. Present owners of
unremediated brownfields receive a large incentive to pursue sale and redevelopment since it
would free them from the ongoing risk of brownfield ownership. The cost of this measure is
borne by future claimants (health claims, wrongful death, loss of property use) who may find that
the limited class of defendants unable to meet the claims made.
The effectiveness of this instrument varies depending on whether it is being considered as a
general reform to civil law, or a government program administered by exception.
General Reform to Civil Law. A disadvantage of transferability as a general reform is the
significant risks of strategic behaviour by private sector agents that could lead to greater
pollution and an increased number of brownfields. Some examples of possible strategic impacts:
•
Strategy by Current Owner. A land owning polluter can escape liability by capitalizing
a shell company sufficient to do clean-up to current standards and meet other tests of
solvency, and then transfer the land and future liability entirely to that company. In short,
the cost of pollution is reduced to the cost of current clean-up. This leaves unanswered
the unknown future risks from contaminants and clean-up methods that science has not
yet revealed, but we know on average they are there. This means that future civil claims
may not be covered, and there may be insufficient resources among liable parties to meet
future regulatory clean-up orders. While “regulatory risk” of retroactive clean-up orders
represents a barrier to brownfield development, it also represents real costs of pollution
that will emerge in the future as the consequences of our actions manifest themselves.
The longer-term impact of allowing binding transfer of liability is that polluting and
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cleaning-up may become more financially attractive and feasible then pollution
prevention – thus perpetuating the bad habits of the past.
Requiring financial depth on the part of anyone receiving transfer of liability is not a
feasible solution. The point of risk is that the large claims will only fall on some people.
Making everyone carry financial depth to answer a large potential civil claims and
regulatory orders would replicate the financial barriers that the policy is trying to remove.
•
Strategic Response by Market System. The same strategy as noted above can occur
without any participant having deliberate bad intentions. Following the enabling of
binding transferability of liability, entrepreneurs may arise who will create companies to
accept these liabilities for a fee.
These companies may meet desirable financial
requirements at the time of transfer, but have their status change later on. This can
happen systematically since holding companies may change hands and it is typical of
entrepreneurs to sell such companies once the transactions are complete. If financial
assets are sitting idle, they will likely be trimmed over time or transferred to other uses
and companies.
•
Higher Environmental Risk-Taking. By making the consequences of contamination
easier to handle for present owners of land, the balance between cost and risk in the
management of manufacturing processes is altered, increasing the likelihood that
manufacturers under financial pressure may run greater risks in the environmental
management of their processes, with the aggregate impact of less pollution prevention,
and more-clean-up when risks are realized in some cases.
A relevant example of the second point above is the recent Canadian experience regulating
PCBs.
By their nature, PCB’s are found in containers such as electrical transformers,
fluorescent light ballasts etc. This makes liability for them literally transferable from one owner
to another since they can be physically transported. Once PCB’s were regulated as a toxic
substance, owners of PCB items were required to store them until provision could be made for
disposal (a long-term issue not yet resolved). There arose companies whose business was to
assume control of the PCBs and store them. Later, some of these companies fell upon hard
times (to put the story in the best light) and did not adequately protect the storage sites. One
result was one of Canada’s largest environmental disasters: in 1988 a poorly maintained PCB
warehouse in St. Basil le Grande, Québec (south of Montreal), caught fire, releasing toxic smoke
from 1,300 M.T. of PCB’s, displacing 3,500 people, and leaving an expensive clean-up
challenge that was assumed by the Québec Ministry of the Environment.
The above examples represent some of the potential systemic responses to shifts in the civil
liability regime. Given the lack of other jurisdictional experience in this area, it is likely that
consultation with stakeholders in the broader legal community and regulatory community should
be undertaken before implementing such changes.
Transferability as a Government Program. A different case can be made where the transfer
of liability is conditional on the land being certified a brownfield, and confirmation of completed
remediation and redevelopment plans. Government screening and validation limit the negative
consequences of the above private sector responses. Negative consequences could further be
reduced by limiting eligibility to land whose contamination originated prior to a set date (related
to the enactment of environmental laws), and/or requiring financial provisions to ensure new
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parties had reasonable means to answer any future damage claims arising from the historical
contamination. The net effect of such provisions would be to make transferability of liability an
exception for the cases in question, rather than a general change in regime.
Table 5.4: Effectiveness of Civil Law Reform
Policy Instrument
Time limits. (NRTEE Rec 2.3) A time limit may
be placed on how long someone may be held
liable after publicly approved remediation has
taken place. This allows closure of risk at least
in terms of time.
Proportionate Liability. Liability can be
limited to a party’s role with respect to the
source of pollution. In the current regime a
minor player may bear the whole cost of a
claim. (NRTEE Rec 2.3, 2.4)
Transferability. (NRTEE Rec 2.1) Parties may
pay others to take on the full liability for future
claims. For example, a landowner may pay a
redeveloper or a specialist firm in land
remediation to assume full risk.
5.5
Most Relevant
Market Failures
Insurance market
failure
Civil risk
Lack of access to
capital
Insurance market
failure
Civil risk
Lack of access to
capital
Insurance market
failure
Civil risk
Lack of access to
capital
Effectiveness for Redevelopment of
Tier 2 Brownfields
Medium. With assistance of land registry and
public notice process. Shifts burden onto claimants
after time limit. Places time horizon on risk but
leaves quantity of claim open for all parties.
High. Allows new parties, such as redevelopers to
enter picture accountable only for their own actions,
not historical acts of others. Makes risks more
knowable and controllable.
Low. (when a general change to civil law)
Potentially very effective in promoting given
brownfields, but opens the way for strategic
behaviour that makes future pollution and clean-up
more attractive than pollution prevention.
Medium to High. (When administered by exception
as a government program). Potentially very
effective in motivating brownfield redevelopment but
may require unique government program costs that
might not be shared with other policy tools.
Regulation
Given the existence of an environmental regulatory framework already, common approaches
range from providing relief to risk of future regulatory clean-up requirements, to allowing
flexible clean-up standards based on restrictions of future land use.
Force Majeure
Force Majeure is the aggressive public pursuit of compulsory site assessments and subsequent
clean-ups through the Canadian federal and provincial regulatory framework.
The disadvantage of this approach is that it increases the market failures stemming from
regulatory risk by increasing the size of that risk, putting a chill on anyone considering involving
themselves voluntarily in redevelopment of a brownfield. Another disadvantage is that it
requires substantial funding, since the holders of land may not have sufficient funds to carry out
the needed remediation after assessments are complete. This is especially true if governments
feel compelled to undertake remediation on an urgent basis and then seek recovery of costs
afterwards.
The force majeure approach is exemplified by the U.S. federal approach through the Superfund,
financed through a tax on the petroleum and chemical industries fed into a trust fund. However,
the focus of the Superfund is on the most polluted land (Tier 3). The chill on development of
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less polluted lands (Tier 2) makes it counter-productive in using the efficiencies of market forces
to redevelop brownfields.
The more recent U.S. promotion of State Voluntary Cleanup programs, and other incentive and
liability-limiting programs reflect efforts to counteract the chilling effect on brownfield
redevelopment generated by the Superfund.
Certificates of Compliance
Certificates of Compliance are issued as part of Government approval of remediation efforts,
usually accompanied with a commitment not to take further regulatory or administrative action
except under specific circumstances.
These certificates are effective in reducing regulatory risk ex-post of meeting current regulatory
requirements. Although civil risk remains, the larger perceived risk by redevelopers is from
government, which has unlimited funds to pursue cases.
A disadvantage of this policy instrument is that it leaves unanswered the question of who will
pay for future clean-up if it is later determined this is needed. As discussed in Section 3.1, such
events will occur, since our understanding of the impact of pollutants continues to increase, and
given the political trend towards greater environmental responsibility. This disadvantage is
mitigated by leaving civil risk untouched. If there is future harm to human health or other landuses, then the possibility of civil court action may still motivate further clean-up. This covers the
worst cases for health claims, but does not address the loss of coverage for larger social and
environmental impacts of pollutants (for example, suits on behalf of endangered species can only
take place within a narrow legislative base, where such laws exist). One possible answer to this
is a compulsory insurance fund (discussed below).
In the U.S., “comfort letters” are usually issued in conjunction with Voluntary Cleanup Programs
(VCPs), which indicate that the EPA is satisfied with the level of clean-up undertaken. State
programs may also undertake more explicit protection, such as a "no further action" letter or
"certificate of completion". However, these state commitments do not affect the EPA's authority.
The EPA’s agreements with states typically include language similar to the following: “Although
nothing in this MOA constitutes a release from liability under applicable Federal law, generally
EPA does not anticipate taking removal or remedial action at sites involved in this Voluntary
Cleanup Program unless EPA determines that there may be an imminent and substantial
endangerment to public health, welfare, or the environment.”44
Flexible Standards
In exchange for restrictions on future land use, sites are allowed to meet remediation standards
appropriate to intended land use. For example, future industrial sites may not be required to
meet the same standards as for a residential development. Flexible standards may include on-site
stabilization of contaminants and on-going control measures that must be monitored.
44
United States EPA (1996). “Memorandum: Approaches for Regional Relations with State Interim Voluntary
Cleanup Programs”. November 14, 1996. See http://www.epa.gov/swerosps/bf/pdf/vcp.pdf
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Flexible standards make redevelopment feasible where it would not otherwise be, but may create
ongoing institutional requirements for monitoring of containment procedures etc. Government
may also have an ongoing cost of monitoring or auditing such arrangements.
Flexible standards are a common feature of U.S. state programs. For example, in the Voluntary
Clean-Up Programs of Massachusetts, Michigan, and Pennsylvania, 85% of sites were mitigated
to levels other than “background’ or “residential”.45
Public Insurance Funds
Public insurance funds are a complement to measures limiting regulatory risk, particularly the
issue of certificates of compliance. A compulsory fund is established to pay for clean-ups
required after owners/redevelopers are released from responsibility. These Funds are financed
by premiums from the people released. A challenge is to set premiums at a realistic level,
discriminating appropriately for more and less risky projects.
The scheme may apply to regulatory risk and clean-up only, or to civil liability. If extended to
civil liability there are potential disadvantages in removing incentives for responsible
precautionary behaviour by the insured.
The literature review did not identify an example of this type of fund.
Table 5.5: Effectiveness of Regulation
Policy Instrument
Force Majeure. Aggressive public pursuit of
site assessments and subsequent clean-ups as
required by the regulatory framework.
Certificates of Compliance. (NRTEE Rec
2.2, 2.6) Government approval of remediation
efforts, usually accompanied with a
commitment not to take further regulatory or
administrative action except under specific
circumstances.
Flexible Standards (Site-Specific
Assessment). In exchange for restrictions on
future land use, allows sites to meet
remediation standards appropriate to the land
use. May include on-site stabilization of
contaminants and ongoing control measures
that must be monitored. (NRTEE Rec 2.5)
Public Insurance Funds. (NRTEE Rec 2.4) A
complement to measures limiting regulatory
risk. A compulsory fund to pay for clean-ups
required after owners/redevelopers released
from responsibility. Financed from premiums
from same.
45
Most Relevant
Market Failures
All cost related market
failures.
Regulatory Risk
Effectiveness for Redevelopment of
Tier 2 Brownfields
Low. This is a Tier 3 strategy, not Tier 2. It
requires significant funding since the costs of forced
clean-ups may not be fully recoverable from the
liable parties. The approach has a chilling effect on
any involvement of redevelopers for Tier 2 land
since it increases perceived regulatory risk.
High. It relieves redevelopers of further regulatory
risk. After meeting requirements, they are “done”.
Although civil risk remains, the larger perceived risk
is from government, which has the funds and
instruments to pursue cases.
All cost related market
failures
Medium. With land registry to implement ongoing
use restrictions. Makes redevelopment feasible
where otherwise not, but creates ongoing
institutional requirements for monitoring of
containment procedures etc.
Regulatory Risk
High. If risk controlled through project-by-project
screening. A needed complement to certificates of
compliance in order to ensure a source of financing
clean-ups as new pollutants or toxic effects are
discovered.
IFC Consulting (1999)
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5.6
Information
Information programs take a variety of forms, ranging from ensuring awareness of the most costeffective technologies; to increasing public understanding of the value of redevelopment; to
ensuring that government actors themselves are fully aware and able to make use of available
policy instruments. Since systematic lack of information is at the root of some market failures,
information programs can be useful policy instruments on their own account.
Public Information
This is information on social value and safety of brownfield redevelopment delivered to public.
This form of information can have an impact on these market failures:
•
•
Stigma and Risk Perception. Public over-estimation of risk associated with remediated
land artificially lowers the value at which redeveloped brownfields can be leased or sold.
Education can lead to more realistic assessments, and establish positive associations with
land recycling and environmental values.
Regulatory Delays. Public perception also affects the risk of regulatory delay through
zoning hearings and other public processes. Positive associations with environmental
values and realistic appreciation of risk can affect the number and form of interventions
by public stakeholders. Because real estate development is inevitably a local issue, a
constructive context of public understanding and support is important.
While all U.S. programs have a public information component, there does not appear to have
been thus far a deliberate intent by governments to pursue this as a separate strategic element.
Technology Dissemination
Lack of knowledge of the most cost-effective remediation practices and brownfield approaches
can mean overestimated costs and reduced brownfield development. This is another form of the
market failure due to information asymmetries. Such market failure is known to be common
when dealing with new technologies, where some are aware and others not.46
The EPA funds pilot projects to facilitate the demonstration of assessment and remediation
technologies. In addition, the EPA has a Technology Innovation Office devoted to the facilitation
of environmental technology and remediation process demonstration.47 The Office has funded
research papers that discuss technical mechanisms to modernize site characterization and cleanup. In addition, the EPA Brownfields Technology Support Centre offers a range of informational
and financing services to brownfield redevelopers.48
46
It is difficult to charge a fee for knowledge equal to its value, since the customer cannot appreciate the value
without first receiving the full knowledge.
47
See the EPA Technology Innovation Office web-site at http://www.epa.gov/swertio1/
48
See the Brownfields Technology Support Center at http://www.brownfieldstsc.org/
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Training/Capacity Building
There are also programs devoted to ensuring public authorities and private sector actors share
full and common understanding of the policy instruments and methods available for brownfield
redevelopment. These programs leverage the effectiveness of other policy interventions. In
addition, they can have a direct impact on some forms of market failure. For example, it has
been suggested that a significant contributor to poor markets for environmental risk insurance
products is the lack of knowledge by municipal officials responsible for land and risk
management (See Section 3.3).
In the U.S. a variety of other information services are supported by the EPA and state services,
including a number of GIS-based web sites offering brownfield location data and related
demographics.49
Table 5.6: Effectiveness of Information Programs
Policy Instrument
Public information.
(NRTEE Rec 3.3) Information on social value
and safety of brownfield redevelopment
delivered to public.
Technology Dissemination.
(NRTEE Rec 3.2) Information on most costeffective practices shared among key actors
and/or demonstrated in pilot projects
Training/Capacity Building. (NRTEE Rec
3.1) Ensuring public and private sector actors
share full and common understanding of the
policy instruments and methods available for
brownfield redevelopment.
5.7
Most Relevant
Market Failures
Regulatory delays
Stigma & risk
perception
Information
asymmetries
Regulatory delay
Information
asymmetries
Insurance market
failures
Effectiveness for Redevelopment of
Tier 2 Brownfields
High. Positive public support can reduce delay in
municipal approval processes and increase
acceptance of redeveloped sites to live and work in.
High. Awareness of feasibility of best practices
increases likelihood that redevelopers will at least
assess potential projects.
High. For example, it has been suggested that a
significant contributor to poor markets for
environmental risk insurance products is the lack of
knowledge by municipal officials responsible for
land and risk management.
Institutional Development
Costs of redevelopment can be lowered through standardized assessment techniques; the
promotion of professions and professional practices related to remediation; land registries to
support limitations of land use and restrictions or covenants affecting liabilities; etc.
This class of policy instrument reflects a response to the available economies of scales that can
be unlocked through better institutional frameworks (see economies of scale discussion, Section
3.3).
Standards of Practice
This form of institutional development involves the development of standards of practice for site
assessment and remediation, ideally integrated with regulatory processes and requirements. In
addition to reducing regulatory delay, standardized practices also permit the construction of
49
See for example New Jersey’s “i-MapNJ Brownfields” GIS page at
map/brownfields/
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larger pools of land for insurance purposes, allowing the development of more standardized
insurance instruments and lowering the cost of insurance. As practices continue to grow, new
professions can emerge and professional practice insurance can take a greater role in meeting
brownfield insurance needs.
On the side of professional practice, there is current investment in voluntary codes of practice in
both the U.S. and Canada. For example, the American Society for Testing and Materials (ASTM)
has published Standard Guide for Process of Sustainable Brownfields Redevelopment as well as
Standard Practice for Environmental Assessments.50 Similarly, the Canadian Standards
Association has published guides on environmental site assessment.51
At present U.S. regulatory practices vary between states, reflecting the diversified nature of EPA
programs undertaken in partnership with states.
Deed Registration
Deed registration is a public system of registering environmental remediation history and related
land-use restrictions. This institution is necessary for applying other policy instruments. For
example, if there are flexible remediation standards related to restrictions on future land-use,
then those restrictions need to be registered in a way that is accessible to future land-owners and
purchasers. Another example would be time limits on civil liability for remediated lands. If time
limits are applied to lands on a project-by-project basis, then the specific dates and conditions
also need to be publicly recorded.
Land Pre-Qualification
Eligible land for special programs is identified and pre-qualified for assistance before a
redeveloper or particular proposal is put forward. An investment in pre-selecting and approving
eligible Tier 2 brownfields offers increased effectiveness to other tools. Tax provisions can be
restricted to qualified land (see discussion of pre-qualified land and tax credits, Section 5.1
above). Investors can experience a shorter project incubation period with less risk of regulatory
delay. Insurers can tailor products to a known pool of land. If the list is limited to historicallycontaminated land only, then special concessions in liability can be made which might otherwise
provoke bad behaviour by future polluters if adopted as a general rule.
50
American Society for Testing and Materials (2002). E1984-98 Standard Guide for Process of Sustainable
Brownfields Redevelopment. Available for purchase from http://www.astm.org/; American Society for Testing and
Materials (2002). E1527-00 Standard Practice for Environmental Site Assessments: Phase 1 Environmental Site
Assessment Process. Available for purchase from http://www.astm.org/
51
Canadian Standards Association (n.d.) Z768 Phase I Environmental Site Assessment. Available for purchase from
http://www.csa.ca/;
Canadian Standards Association (n.d.) Z769 Phase II Environmental Site Assessment.
Available for purchase from http://www.csa.ca/.
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Table 5.7: Effectiveness of Institutional Development
Policy Instrument
Standards of Practice. (NRTEE Rec 2.5)
Development of standards of practice for site
assessment and remediation, ideally integrated
with regulatory processes and requirements.
Deed registration. A public system of
registering environmental remediation history
and related land-use restrictions.
Land pre-qualification. Programs to prequalify land as eligible for other brownfield
redevelopment initiatives.
5.8
Most Relevant
Market Failures
Regulatory delays
Economies of scale
Insurance market
failures.
Regulatory Delays
Effectiveness for Redevelopment of
Tier 2 Brownfields
High. In association with use of other policy
instruments.
Regulatory delays
Economies of scale
Insurance market
failures
High. Reduces regulatory delay in processing
project proposals and also provides a means to
more effectively focus other policy instruments on
Tier 2 land.
High. As a complement to other policy instruments
such as flexible standards of remediation.
Direct Redevelopment
Government, government agency, or private charity, may assume ownership of the land and
undertake its remediation and preparation for resale or development. Private land banks may
also be established for this purpose, paralleling the structure of charitable organizations for the
preservation of wetlands and rainforests.
This approach ties up considerable funds and public initiative for work that could be encouraged
on a private basis with greater flexibility by redevelopers. It is antithetical to attempts to utilize
the efficiency of markets characterizing a focus on Tier 2 brownfield redevelopment.
A U.S. example of government use of this policy instrument is the City of Minneapolis.
Minneapolis maintains a Light Industry Land Acquisition Program, spending $5 million per year
to acquire, clean-up, and redevelop contaminated industrial sites for re-sale to the private sector.
Table 5.8: Effectiveness of Direct Redevelopment
Policy Instrument
Land reclamation banks. Agencies may be
created either publicly or privately to hold
brownfields, remediated them, and return them
to market.
Most Relevant
Market Failures
All cost related market
failures.
Effectiveness for Redevelopment of
Tier 2 Brownfields
Low. This ties up considerable funds and public
initiative for work that could be encouraged on a
private basis with greater flexibility by redevelopers.
A consolidated table of the effectiveness of policy instruments is provided in Appendix B.
6
RANKING POLICY INSTRUMENTS BY GROUP
The preceding text assessed the effectiveness of policy instruments on an individual basis.
However, the action of these instruments is interdependent and, in some cases, redundant. The
design of an effective strategy involves selecting a complementary package of the most effective.
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As a start, Section 4.0 established two key features of an effective strategy:
•
•
Strategic measures should address both risk and financial incentives in order to fully
capture the wealth creation potential of Tier 2 brownfields.
Project-by-project assessment is necessary to implement financial incentives, in order to
avoid giving money unnecessarily to Tier 1 brownfields, and to ensure that financial
assistance shares the benefits between the public and the redeveloper, rather than
transferring it all to redevelopers at the taxpayer’s expense.
Consistent with the second point, redevelopment of Tier 2 lands will range from brownfields that
are marginally unprofitable to those that require significant assistance to motivate the private
sector to take an interest. An effective strategy will utilize broad systemic measures to nudge
the former into redevelopment and apply increasingly focussed incentives to the latter.
From this perspective, effective intervention tools can be ranked in the following groups.
Broad Systemic Measures
The following tools were found to be effective individually, and provide the highest yield with
minimal impact on the public purse. They are focused on correcting market failures leading to
developers over-valuing costs or requiring excessive rates of project return due to undiversifiable
risks:
•
•
•
•
•
Deductible remediation expenses (qualified by simple limits and eligibility rules).
Mortgage insurance for brownfield redevelopment (market making by the CMHC)
Lender liability limits
Time limits on civil liability
Proportionate allocation of civil liability (as opposed to joint and several liability)
Project-by-Project Measures
Redevelopments that are net-wealth creating, but further from break-even as perceived by the
private sector, will require more additional incentive with greater implications for the public
purse. To limit these expenditures to Tier 2 land, and on an as-needed basis, implementation
would have to be on a project-by-project basis. Ideally this would take place within a framework
of co-operation among different levels of government to avoid duplication. Depending on the
private sector viability of the project, required assistance might range from providing some
assurance limiting future risk of clean-up orders (at the low end), to loans and grants (at the high
end of assistance). Measures found to be effective in this group include:
•
•
•
•
•
•
Certificates of Compliance & Associated Public Insurance
Remediation loans
Project loans (e.g. revolving funds etc.)
Abatements
Tax forgiveness
Grants
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Measures Increasing Leverage
Once the most substantive sources of market failure are addressed, there are additional policy
tools that increase the effectiveness of other interventions at reasonable cost. This includes better
information to consumers, practitioners, and redevelopers, and measures to standardize and
develop institutions supporting brownfield redevelopment. Tools identified as effective in this
group are:
•
•
•
•
•
•
Standards of Practice (in regulation and professional practice)
Deed registration
Land pre-qualification
Public information.
Technology dissemination.
Training & capacity building.
The above sets may be implemented as groups. Jointly they offer the highest level of effective
intervention for the redevelopment of brownfields by correcting market failures and harnessing
the efficiencies of the private sector.
7
SITUATING THE NRTEE STRATEGY
The National Round Table on Environment and the Economy (NRTEE’s) development of a
National Brownfield Redevelopment Strategy incorporates the results of consultation among
Canadian stakeholders. The experience of stakeholders represents an independent source of
wisdom that the analysis in this paper, and other research papers, is intended to serve and
complement.
NRTEE’s selection of recommendations through the consultation process embodies most of the
characteristics suggested by this analysis of market failures. There are measures addressing the
market failures emerging from uncontrolled civil and regulatory risk, and measures to deliver
financial incentives where required. Systemic delivery of financial incentives is mild (e.g.
deductibility of remediation of expenses), with the use of grants and loans reserved for qualifiedlands selected in a context of intergovernmental cooperation.
Leverage of the programs is
increased through the use of information tools directed at the needs of different stakeholders, and
needed institution building. Appendix B of this paper cross-references the generic instruments
analysed here with the NRTEE recommendation numbers.
There are three aspects of the NRTEE strategy that are uniquely Canadian:
•
A focus on Tier II lands, rather than Tier III.
The United States’ approach is
dominated by the EPA’s Superfund – a force majeure approach forcing the clean-up of
the worst sites. The U.S. has experienced drawbacks to this approach, particularly
increased reluctance of redevelopers and lenders to involve themselves voluntarily with
brownfields. The NRTEE strategy is to focus on the most recoverable lands, Tier 2, with
positive measures addressing market failures.
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•
•
Use of Mortgage Insurance.
The central role of Canada Mortgage and Housing
Corporation (CMHC) in market making for real-estate insurance products provides a
unique asset for addressing brownfield redevelopment.
Focus on Civil Liability. The NRTEE strategy includes significant measures directly
addressing the barriers to redevelopment caused by the current civil liability regime. This
is not a part of U.S. experience, whose recent state and federal efforts have been focussed
on ameliorating the high regulatory risk perceptions created through strong
environmental laws such as the Superfund.
There is one element of the NRTEE strategy for which this study has raised caution. The
proposed transferability of civil liability was found to open risks of strategic behaviour leading to
a preference for pollution and clean-up over pollution prevention, and of un-funded civil liability
claims.
However, the degree of risk is difficult to assess since there is an absence of
international experience in this kind of change to civil liability for brownfields. The risks may
be addressed during broader consultation with the legal community and other stakeholders
during the implementation phases of the Strategy.
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Appendix A - 5
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Appendix A - 6
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Appendix A - 7
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Development Administration.
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May 1, 2002 – April 30, 2004.
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Development: They DO Go Together.” Unpublished paper.
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Appendix A - 8
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New Jersey Brownfields
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Unlocking Economic Potential with an
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Hara Associates
Appendix A - 9
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Shaw
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Chapter
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U.S. EPA (1998). Handbook of Tools for Managing Federal Superfund Liability Risks at
Brownfields and Other Sites. November 1998. United States Environmental Protection Agency:
Publication Number EPA 330-B-98-001
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WebSite http://www.epa.gov/international/urban/brownfields/index.html
U.S. EPA (2002). “International Brownfields Case Study: National Groundwork Trust,
Birmingham,
England.”
EPA
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http://www.epa.gov/international/urban/brownfields/index.html
U.S. EPA (2002). “International Brownfields Case Study: Waterfront Regeneration Trust,
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U.S. EPA (2002). “International Brownfields Case Study: Westergasfabriek, Amsterdam,
Netherlands.” EPA WebSite http://www.epa.gov/international/urban/brownfields/index.html
U.S. House of Representatives. (2000) The Reality Behing the Rhetoric: The failures of EPA’s
Brownfields Initiative http://com-notes.house.gov/brown/brown.htm
Hara Associates
Appendix A - 10
U.S. Mayor (2002) “ Major Provisions of H.R. 2869 – The Small Business Liability Relief and
Brownfields Revitalisation Act.” U.S. Mayor January 14, 2002
Walters, Jonathan (2002). “A Lesson in Brown.” Governing (May 2002): 12.
Weber, Bruce R. (2001). “A Beginning Best Practice Valuation Model: A Presentation for the
International
Real
Estate
Society.”
Presentation
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http://www.marketforesight.com/AcrobatResearch/part6.pdf
Weber, Bruce R. (2002). “A Beginning Best Practice Brownfield Valuation Model.” The
Appraisal Journal (January 2002): 60-75.
Wernstedt, K.; Hersh, R. (1998) “Urban Land Use and Superfund Clearnups” Journal of Urban
Affairs (20/4) 459-474
Wright, James G. (1997). Risks and rewards of brownfield redevelopment. Cambridge, MA :
Lincoln Institute of Land Policy.
Yount Kristen R. (n.d.).
Unpublished paper.
“Government Involvement with Brownfield Insurance Programs.”
Yount, K.R. & Meyer, P.B. (1994) “Bankers, Developers, and New Investment in Brownfield
Sites: Environmental Concerns and the Social Psychology of Risk” Economic Development
Quarterly (8/4) 338-344
Yount, K.R. (1999)
“Environmental Insurance Products Available for Brownfields
Redevelopment, 1999.” Northern Kentucky University, Highland Heights, KY
Yount, K.R. with help of Meyer, P.B. (1999) “Environmental Insurance Products Available for
Brownfields Redevelopment, 1999”, Northern Kentucky University, Highland Heights, KY
Yount, Kristen R. (2001). “Limiting Liability with Insurance.” Presented at the First Annual
Statewide Brownfields Conference, March 27, 2001.
Hara Associates
APPENDIX B – SUMMARY TABLE
Effectiveness of Commonly Used Policy Instruments for Brownfield Redevelopment
Policy Instrument
Tax Reforms/Incentives
Deductible Remediation Expenses. (NRTEE
Rec 1.1) Allows redevelopers to deduct
remediation costs as a current expense, rather
than capitalizing as part of redevelopment
costs. The tax benefit is in the year the
expense is made, rather than spread over
future years.
Tax Credits.
Providing $ through tax
reductions
matching
expenditures
on
remediation of brownfields.
Abatements. Includes abatements of property
taxes, development charges, planning fees, etc.
Tax Forgiveness. (NRTEE Rec 1.2) Historical
taxes owing on lands, such as federal liens,
may be forgiven.
Direct Financial Assistance
Grants -Assessment/Cleanup. (NRTEE Rec
1.5) Money given to support site assessment
and remediation.
Grants – Project Support. (NRTEE Rec 1.5)
Money given directly to support a project either
through grants, free services, etc.
Capital Market Interventions
Assumption of Liability. Through individual
project agreements, Governments can assume
the liability for future civil and regulatory risk
once given remediation requirements are met.
Remediation Loans. (NRTEE Rec 1.4) Loans
may be for assessment and remediation.
Project Loans. (NRTEE Rec 1.4) Through
devices such as revolving funds, low interest
loans may be provided. Funds “revolve,” by
using loan repayments (principal and interest)
to provide new loans.
Loan Guarantees. As an alternative to direct
lending – a portion or all of loans to projects
may be guaranteed.
Most Relevant
Market Failures
EFFECTIVENESS FOR
REDEVELOPMENT
Tax system
impediments
High - when combined with simple rules to limit
abuse – such as %cap on share of expenses, or
professional certification of requirements.
Third party wealth
impacts
Infrastructure,
transportation, and
municipal services
cost savings.
Tax system
impediments
Low-Medium. If unrestricted, credits could go to
Tier 1 sites
High. If restricted to land pre-qualified as Tier 2, and
for historical pollution only.
High. If applied on a project specific as-needed
basis.
High. If applied on a project specific as-needed
basis.
Liens may be worthless if land not
redeveloped. Application limited to where liens exist.
Information
asymmetry
Capital market failures
Third party wealth
impacts
Third party wealth
impacts
Infrastructure,
transportation, and
municipal services
cost savings
High. If applied on a project specific basis. Levels
playing field with greenfields and delivers funds at
early stage where external capital less available.
Regulatory & civil risk
Lack of access to
capital
Insurance market
failure.
Lack of access to
capital
Low. Public institutions do not manage this form of
accumulated risk well. As the accumulated risk
mounts, public cost of borrowing is affected.
Lack of access to
capital
Lack of access to
capital
Insurance market
failure.
Hara Associates
Medium. If applied on project specific as-needed
basis. Potential for excessive funding, and funding
of Tier1 or Tier 3.
High. If applied on a project specific, as needed
basis, and in combination with other measures.
Access to capital is delivered early in project where
market failure is greatest. However, administrative
costs can be a significant deterrent to applicants if a
stand-alone program.
High. If applied on project specific, as needed
basis. The subsidized interest rates provide modest
financial support, while overcoming a key market
failure.
Medium. As with assumption of liability, public
bodies do not manage this form of accumulated risk
well. If a high % of a loan is guaranteed, then one is
effectively making the loan directly with weakened
due diligence. If a low % of loan is guaranteed, then
Appendix B - 2
Policy Instrument
Most Relevant
Market Failures
Mortgage Insurance. (NRTEE Rec 1.3) A
specific form of loan guarantee where the loan
is secured by the land being redeveloped.
Lack of access to
capital.
Insurance market
failure.
Lender liability limits. (NRTEE Recs 2.2, 2.3)
Lenders, especially those who assume control
of land after mortgage defaults, are protected
from regulatory and/or civil liability for pollution
and clean-up.
Civil Law Reform
Time limits. (NRTEE Rec 2.3) A time limit may
be placed on how long someone may be held
liable after publicly approved remediation has
taken place. This allows closure of risk at least
in terms of time.
Proportionate Liability. (NRTEE Rec 2.3, 2.4)
Liability can be limited to a party’s role with
respect to the source of pollution. In the current
regime a minor player may bear the whole cost
of a claim.
Transferability. (NRTEE Rec 2.1) Parties may
pay others to take on the full liability for future
claims. For example, a landowner may pay a
redeveloper or a specialist firm in land
remediation to assume full risk.
Lack of access to
capital.
Regulatory & civil risk.
Regulation
Force Majeure. Aggressive public pursuit of
site assessments and subsequent clean-ups as
required by the regulatory framework.
Certificates of Compliance. (NRTEE Rec
2.2, 2.6) Government approval of remediation
efforts, usually accompanied with a
commitment not to take further regulatory or
administrative action except under specific
circumstances.
Flexible
Standards
(Site-Specific
Assessment). In exchange for restrictions on
future land use, allows sites to meet
remediation standards appropriate to the land
use. May include on-site stabilization of
contaminants and ongoing control measures
that must be monitored. (NRTEE Rec 2.5)
Public Insurance Funds. (NRTEE Rec 2.4) A
complement to measures limiting regulatory
risk. A compulsory fund to pay for clean-ups
required after owners/redevelopers released
EFFECTIVENESS FOR
REDEVELOPMENT
the impact on the project is weak.
High. In Canada, there is a market making
institution in the form of the CMHC that has the
ability to manage portfolio risk, and ensure
appropriate degrees of coinsurance and precaution
by primary lenders.
High. Removes a major barrier for mortgage
lenders, who might otherwise find themselves full
bearers of civil and regulatory risk in the event of
loan default – removing the value of land as
collateral.
Insurance market
failure
Civil risk
Lack of access to
capital
Insurance market
failure
Civil risk
Lack of access to
capital
Insurance market
failure
Civil risk
Lack of access to
capital
Medium. With assistance of land registry and public
notice process. Shifts burden onto claimants after
time limit. Places time horizon on risk but leaves
quantity of claim open for all parties.
All cost related market
failures.
Low. This is a Tier 3 strategy, not Tier 2. It requires
significant funding since the costs of forced cleanups may not be fully recoverable from the liable
parties. The approach has a chilling effect on any
involvement of redevelopers for Tier 2 land since it
increases perceived regulatory risk.
High. It relieves redevelopers of further regulatory
risk. After meeting requirements, they are “done”.
Although civil risk remains, the larger perceived risk
is from government, which has the funds and
instruments to pursue cases.
Regulatory Risk
High. Allows new parties, such as redevelopers to
enter picture accountable only for their own actions,
not historical acts of others. Makes risks more
knowable and controllable.
Low. (when a general change to civil law)
Potentially very effective in promoting given
brownfields, but opens the way for strategic
behaviour that makes future pollution and clean-up
more attractive than pollution prevention.
Medium to High. (When administered by exception
as a government program).
Potentially very
effective in motivating brownfield redevelopment but
may require unique government program costs that
might not be shared with other policy tools.
All cost related market
failures
Medium. With land registry to implement ongoing
use restrictions. Makes redevelopment feasible
where otherwise not, but creates ongoing
institutional requirements for monitoring of
containment procedures etc.
Regulatory Risk
High. If risk controlled through project-by-project
screening. A needed complement to certificates of
compliance in order to ensure a source of financing
clean-ups as new pollutants or toxic effects are
Hara Associates
Appendix B - 3
Policy Instrument
from responsibility. Financed from premiums
from same.
Information
Public information.
(NRTEE Rec 3.3) Information on social value
and safety of brownfield redevelopment
delivered to public.
Technology Dissemination.
(NRTEE Rec 3.2) Information on most costeffective practices shared among key actors
and/or demonstrated in pilot projects
Training/Capacity Building. (NRTEE Rec
3.1) Ensuring public and private sector actors
share full and common understanding of the
policy instruments and methods available for
brownfield redevelopment.
Institutional Development
Standards of Practice. (NRTEE Rec 2.5)
Development of standards of practice for site
assessment and remediation, ideally integrated
with regulatory processes and requirements.
Deed registration.
A public system of
registering environmental remediation history
and related land-use restrictions.
Land pre-qualification. Programs to prequalify land as eligible for other brownfield
redevelopment initiatives.
Direct Redevelopment
Land reclamation banks. Agencies may be
created either publicly or privately to hold
brownfields, remediated them, and return them
to market.
Most Relevant
Market Failures
EFFECTIVENESS FOR
REDEVELOPMENT
discovered.
Regulatory delays
Stigma & risk
perception
High. Positive public support can reduce delay in
municipal approval processes and increase
acceptance of redeveloped sites to live and work in.
Information
asymmetries
High. Awareness of feasibility of best practices
increases likelihood that redevelopers will at least
assess potential projects.
Regulatory delay
Information
asymmetries
Insurance market
failures
High. For example, it has been suggested that a
significant contributor to poor markets for
environmental risk insurance products is the lack of
knowledge by municipal officials responsible for land
and risk management.
Regulatory delays
Economies of scale
Insurance market
failures.
Regulatory Delays
High. In association with use of other policy
instruments. Common and integrated standards of
practice.
Regulatory delays
Economies of scale
Insurance market
failures
High. Reduces regulatory delay in processing
project proposals and also provides a means to
more effectively focus other policy instruments on
Tier 2 land.
All cost related market
failures.
Low. This ties up considerable funds and public
initiative for work that could be encouraged on a
private basis with greater flexibility by redevelopers.
Hara Associates
High. As a complement to other policy instruments
such as flexible standards of remediation.
APPENDIX C: NOTE ON ROUGH ESTIMATE OF
NATIONAL PUBLIC BENEFITS FOR CANADIAN BROWNFIELD REDEVELOPMENT
January 15, 2003
This note is intended to develop a rough order-of-magnitude estimate of the national public
benefits for directing future urban growth into the redevelopment of brownfields within Canada’s
cities, instead of greenfields on city peripheries. Public benefits are those benefits generated for
Canadians in addition to any direct commercial benefits realized by the developers and users of
the land. For a full discussion of why there are additional benefits to those realized by private
sector agents, please see Market Failures and the Optimal Use of Brownfield Redevelopment
Policy Instruments, Hara Associates, 2003.52
This estimate was developed using references close at hand as a result of the 2003 work. It is
intended as a rough estimate for working purposes only. Comments on how the accuracy of the
estimate can be improved are offered at the end of this note.
1
ESTIMATION METHOD
There is very little published work quantifying the benefits and costs of brownfield
redevelopment. For Canada, there is only one substantive article published recently by Chris De
Sousa, Measuring the public costs and benefits of brownfield versus greenfield development in
the Greater Toronto Area. 53
To obtain an estimate of the national benefits to Canada, this note:
•
•
Updates the De Sousa estimates for Toronto to reflect recent work on the impact of
brownfield redevelopment on the productivity and wealth generation capability of cities.
Projects the revised Toronto estimates to a national level based on Census information for
Canadian metropolitan areas.
Hara Associates would like to express appreciation to Dr. De Sousa for providing background
information and copies of reference materials relevant to the original article.
2
2.1
UPDATING DE SOUSA ESTIMATES FOR TORONTO
The De Sousa (2002) Estimates
De Sousa (2002) integrated available quantitative estimates on benefits and costs from a variety
of sources and applied them in a Canadian brownfields context. Net public benefits were
assessed for two hypothetical cases: a commercial brownfield development and a residential
brownfield development. In each case, benefits are measured against the alternative case of
placing the same number of residents or employees in a typical suburban greenfield project..
52
Undertaken as a background study to the National Brownfields Redevelopment Strategy by the National Round
Table on the Environment and the Economy (NRTEE), Ottawa, Canada.
53
Environment and Planning B: Planning and Design 2002, volume 29, pages 251-280.
Hara Associates
Appendix C - 2
Only public benefits and costs were considered, with the intention of “helping policymakers
better assess the feasibility of brownfield redevelopment vis-à-vis greenfield”.54
Table 1 below summarizes the De Sousa (2002) estimates in terms of net benefit per hectare of
brownfield redeveloped. Benefits were calculated on an annualized basis, rather than net present
value over time. Where there was a one-time benefit, as in development charges, the result was
converted to an annualized basis using a 5% rate of interest (e.g. for every $100 one-time benefit,
an annualized $5 was assessed). For brownfields redeveloped for an average industrial case, the
net public benefits were an estimated $100,703 per year per hectare. For residential
redevelopment the benefits were an estimated $74,124.
Table 1: Annualized Net Public Benefits
Per Brownfield Hectare Redeveloped
(De Sousa (2002))
Benefit Item
Net Brownfield Benefits
Industrial
Residential
Case ($/ha)
Case ($/ha)
Tax Revenues
$48,019
Development Charges
(Annualized)
$18,134
Transportation
Externalities
$19,170
Agricultural Land
Preservation
$3,756
Reduced Health Risks
$6,487
Air pollution
$0
Jobs
$0
Neighborhood
Improvement
Annual Net Benefit Per
Hectare
$5,138
$100,703
Definitions/Assumptions
Change in property tax revenue net of
($15,785) incremental costs to municipality of
providing services.
Net of incremental capital costs to
$1,348 municipality – annualized at 5% interest
rate.
Congestion, airborne emissions,
accidents, etc. by passenger car, truck,
$66,619
and rail. Emissions valued at control
costs.
At least equal to gross farm receipts
$5,329
annually from greenfield space saved.
Valued at cost of remediation of the
$10,811
brownfield land.
Emissions by plant or residential
$557
housing.
$0 No net jobs.
Increased property tax revenue only,
$5,246 based on 5% increase in value on land
area equal to brownfield.
$74,124
Note that the estimates reported in Table 1 are relative to equivalent greenfield sites as per
average case studies developed by De Sousa.
Thus, there is a net property tax loss for the
residential brownfield (minus $15,785 annually), since the net property tax revenue (e.g. Toronto
property tax revenues, net of costs to serve the development), was higher for the equivalent
greenfield residential development.
To project from per hectare benefits to the whole of the Greater Toronto Area, De Sousa (2002)
constructed two scenarios for the estimated 350 hectares of brownfield land in the area:55
54
Ibid. – abstract, page 251.
Hara Associates
Appendix C - 3
•
•
Low: 60% of brownfield land was net developable, the other 40% being required for
parks, roads, sidewalks etc.
High: 90% of brownfield land was net developable.
Table 2 provides the resulting annualized public benefits for brownfield redevelopment over
greenfields for the whole of the Greater Toronto Area.
Table 2: Original Estimates for
Annualized Brownfield Public Benefits in Toronto
(De Sousa (2002))
Estimate
Low
High
2.2
All Commercial
$21,147,613
$31,721,419
All Residential
$15,566,094
$23,349,140
Updating Impact on Property Values and Productivity
Cities are the engines of Canadian economic activity and growth. Each achieves its role through
unique location advantages plus the shared characteristic of all cities: compactness.
Compactness means that economic agents are closer to one another, realizing lower transaction
costs and forming more complex working relationships. Infilling brownfields increases the
compactness of cities, improving productivity. The most easily observed impact is increased
value of land surrounding a redeveloped brownfield.
De Sousa (2002) assumed that a neighboring area of land equal to the brownfield area would
increase in value by 5% (Neighborhood Improvement in Table 1). Current literature suggests
the impact on property value is significantly greater, not only in proportion but in geographic
reach.
The estimate was revised to assume that land-area in a 2.42 kilometer56 radius surrounding
redeveloped brownfields increased in value by 10%. This assumption is based on empirical
work by Ihlanfeldt, Keith R. and Laura O. Taylor (2002), Assessing the Impacts of
Environmental Contamination on Commercial and Industrial Properties.57 They estimated a net
impact of one billion $U.S. in property value neighboring 44 brownfield sites. The 10% impact
is a conservative assumption based on commercial property, since residential property values
have typically been estimated as being impacted at 30% of value (see discussion in Section 3 of
Hara Associates (2003)).
To account for the increased land area affected, it was necessary to make some assumptions
about the distribution of the 350 hectares of land. If the land were distributed in many small
parcels, it would affect a larger total area, since each parcel may account for at minimum a circle
of neighboring land of radius (adjusted for any overlap). Hemson (1998), the source document
55
The 350-hectare estimate was drawn from tables appended to Hemson Consulting (1998) Retaining Employment
Lands – Morningside Heights – A report to the City of Toronto Economic Development, Tourism & Culture.
56
1.5 miles in the original estimate.
57
UC San Diego Division of Social Sciences Working Paper. (Sponsored by U.S. Environmental Protection
Agency)
Hara Associates
Appendix C - 4
cited by De Sousa, included a map of sites with approximately 22 distinct sites or agglomerations
of brownfield sites, for an average site size of 15.9 hectares. The most conservative assumption
for shape of the average parcel of brownfield land is that of a circle, with radius of 225 meters.58
Surrounding land would be the area of a circle of 2,645 meters (2420 meters plus 225 meters),
less the area of the brownfield itself at radius 225 meters. The result is 2,180 hectares of
surrounding land impacted for every 15.9 hectares of brownfield in the Toronto area, or 137
hectares experiencing a 10% increase in property value for every hectare of brownfield
developed. Since De-Sousa conservatively assumed a one for one ratio, the original De-Sousa
estimate for property tax flows must be multiplied by 137 to better account for the volume of
surrounding land affected by remediating brownfield land.
In addition to increasing the volume of land, two other adjustments must be made:
•
•
Higher Estimated % Impact. The original value must also be doubled to reflect an
assumed impact of 10% on property value rather than 5%.
Counting benefits to owners of neighboring lands. The De Sousa estimate counted
only increased property tax as a public benefit. It is more correct to also count as a
public benefit the increased income stream to the owner of neighboring properties, since
that too is part of the additional wealth created for society when a brownfield is
redeveloped.59 There is insufficient data within the De Sousa article to calculate this
impact. However, it is reasonable to assume that property tax does not take more than
half of the revenue generated to landowners from property. Therefore, we may
conservatively double the tax revenue to arrive at collective benefit.
The joint adjustment of significantly greater surrounding area affected, a 10% impact on property
value instead of 5%, and including benefits to the surrounding land owners themselves, means
that the original De Sousa estimate for “neighborhood improvement” should be increased by a
factor of 548 times (137 × 2 × 2). Thus, the original estimate of $5,318 annually for this item
under a commercial redevelopment becomes $2.8 million annually.
While this may seem a large adjustment, it reflects the importance of brownfields on the
compactness and consequent more effective land use that is core to the value-generator that is a
city. The amount cited reflects gains not to the redeveloped brownfield, but to the larger
surrounding area that it impacts.
2.3
Including Productivity Increases for Non-Property Factors of Production
The preceding section included the impact of brownfield development on third-party property
holders. However, the property holder’s gain represents only a part share of the total
productivity gain. Other factors of production have their own scarcity within a city, and share in
the increased earnings. A precise estimate would require substantial information on land use,
factor incomes, and price sensitivities of supply and demand. In the absence of this information,
it is conservative to assume that land, one factor of production, does not capture more than half
the value of the increase in productivity. Thus the gains to other factors are assumed to be at
58
Assuming a more reasonable square shape results in a higher estimate of land area affected. Although unrealistic,
a circle provides the most conservative result.
59
In economic terms, benefits to neighboring landowners are an externality, since they are often not part of (external
to) the private sector participants in the development decision for the brownfield.
Hara Associates
Appendix C - 5
least equal to the combined returns to landowners and property tax from brownfield
redevelopment. To account for this an additional line was added to the benefit/cost ledger, with
a net benefit equal to the net benefit entered on the “neighbourhood improvement” line.
2.4
Other adjustments to the estimates
Two other adjustments were made to the original De Sousa (2002) estimates:
•
Annualizing Development Charge gains. These represent one-time gains that had
been annualized at an interest rate of 5%.
In principal, for public policy decisionmaking, the conversion between annualized and one-time (net present value) numbers
should be performed using the social discount rate (the opportunity cost of capital to
society averaged across asset types and adjusted for tax distortions). In place of the 5%
used in the original article, a 10% social discount rate was used. 10% is the central value
estimate for the social discount rate still endorsed by Treasury Board Secretariat of the
Canadian federal public service. The 10% estimate is significantly out-dated. More
recent academic estimates for Canada have tended to place the rate lower, but likely
above 5%.
•
Value of life in Crash Cost Savings. The De-Sousa calculation of traffic externalities
includes specific estimates of kilometres of passenger automotive vehicle travel saved
from brownfield redevelopment over greenfield. The value per kilometre for reduced
accidents shown in the article does not appear to include the value of lives saved from
reduced traffic accidents. The article reports accident savings as one tenth of one cent
per kilometre. In contrast, a value of eight cents per kilometre is suggested, based on a
value per accident fatality avoided of $3.9 million60, and a fatality rate in the U.S. of 13.4
deaths per billion miles travelled. In the case of a residential development, this increases
the savings per hectare from transportation externalities from $66,619 to $118,168
annually, as a result of the reduced travel by occupants of more urban residential
developments. A lower but similar adjustment is made for commercial developments
(see Table 3 below).
Revised Estimates for Toronto
Table 3 below re-estimates the net public benefits per hectare reported in Table 1. Resulting
High and Low Estimates for the City of Toronto are provided in Table 4, using the same land
utilization assumptions as De Sousa (2002). The revised net gains from diverting growth to
brownfields from greenfields ranges from between $1.2 billion and $1.8 billion annually for the
greater Toronto Area.
60
Central estimate for value of statistical life of average Canadian under age 65, in 1996 dollars, by Air Quality
Valuation Model Version 3.0 - Report #2 Methodology - 1999, Stratus Consulting for Health Canada & Environment
Canada.
Hara Associates
Appendix C - 6
Table 3: Annualized Net Public Benefits
Per Brownfield Hectare Redeveloped
(Updated & Revised)
Benefit Item
Tax Revenues
Development Charges
(Annualized)
Transportation
Externalities
Net Brownfield Benefits
Industrial
Residential Changes in Definitions/Assumptions
Case ($/ha)
Case ($/ha)
$48,019
($15,785) No change.
Annualized at 10% social discount rate
$36,268
$2,696
instead of 5%.
Added value of lives saved from
$34,035
$118,868 reduced accident fatalities @ 8 cents
per kilometer.
Agricultural Land
Preservation
$3,756
Reduced Health Risks
$6,487
Air pollution
Jobs
Neighborhood
Improvement
Productivity Increases
to Non-property
Factors of Production.
Annual Net Benefit Per
Hectare
$0
$0
$2,816,665
$5,329 No change.
Valued at cost of remediation of the
brownfield land.
$557 No change.
$0 No change.
10% increase on property within 1.5
miles (2.42 kilometers) and inclusion of
$2,875,871
benefit to third-party neighboring
property owners.
$10,811
$2,816,665
$2,875,871
$5,761,896
$5,874,218
New. At least equal to property value
gain.
Table 4: Annualized Brownfield Public Benefits in Toronto
(Updated and Revised)
Estimate
Low
High
3
All Commercial
$1,209,998,071
$1,814,997,107
All Residential
$1,233,585,821
$1,850,378,732
PROJECTING FROM TORONTO TO NATIONAL LEVEL
There is very little information on brownfield inventories for Canada as a whole. The federal
government maintains a partial inventory of known contaminated sites, but the definition for
these is different from urban brownfields.
Thus projection from Toronto to the Nation can only be on the roughest basis. Tables 5 and 6
provide two alternatives based on the 2001 census. They are by population and by surface area
for Census Metropolitan Areas (CMAs).
Total population for CMAs is approximately 3.8
times that of the Greater Toronto Area by itself, or 11.1 times the land area. Population was
chosen as the most conservative and more appropriate method between the two options. Land
area of cities is set arbitrarily by government regulation.
Hara Associates
Appendix C - 7
Table 5: Greater Toronto Area – 2001 Census
CMA
City of Toronto
Regional Municipality of Durham
Regional Municipality of Halton
Regional Municipality of Peel
Regional Municipality of York
Greater Toronto Area
Population in 2001
2,481,494
506,901
375,229
988,948
729,254
5,081,826
Land Area (square
km)
629.91
2,523.48
967.04
1,241.99
1,761.64
7124.06
Table 6: 27 Census Metropolitan Areas – 2001 Census
CMA
Edmonton
Calgary
Vancouver
Victoria
Abbotsford
Saskatoon
Regina
Winnipeg
Thunder Bay
Greater Sudbury
Ottawa-Hull
Toronto
Kingston
Oshawa
Hamilton
St. Catharines-Niagara
Kitchener
London
Windsor
Chicoutimi-Jonquiere
Quebec
Sherbrooke
Trois-Rivieres
Montreal
Halifax
Saint John
St. John's
TOTAL
Ratio to GTA
Population in 2001
937,845
951,395
1,986,965
311,902
147,370
225,927
192,800
671,274
121,986
155,601
1,063,664
4,682,897
146,838
296,298
662,401
377,009
414,284
432,451
307,877
154,938
682,757
153,811
137,507
3,426,350
359,183
122,678
172,918
19,296,926
3.8
Hara Associates
Land Area (square
km)
9,418.62
5,083.00
2,878.52
695.34
625.94
5,192.22
3,407.84
4,151.48
2,548.16
3,536.10
5,318.36
5,902.74
1,906.82
903.23
1,371.76
1,406.42
826.98
2,333.37
1,022.53
1,753.67
3,154.35
1,108.16
880.47
4,047.35
5,495.54
3,359.61
804.63
79,133
11.1
Appendix C - 8
Table 7 reports the resulting projection of Table 4 to Canadian CMA’s as a whole, based on
population. National benefits of brownfield development are estimated to be between $4.6 and
$7.0 billion annually. On a capitalized basis, using the previously discussed 10% social discount
rate, net benefits are between $46.0 billion and $70.3 billion.
Table 7: Annualized Brownfield Public Benefits for Canada
($ Billions)
Estimate
Low
High
All Commercial
$4.6
$6.9
All Residential
$4.7
$7.0
Table 8: Net Present Value of Brownfield Public Benefits for Canada
($ Billions)
Estimate
Low
High
4
All Commercial
$46.0
$69.0
All Residential
$46.9
$70.3
METHODS FOR IMPROVING ESTIMATES
As noted in the introduction, the above estimates may be considered order-of-magnitude working
numbers only. Although larger than the De Sousa estimates, they are based on conservative
assumptions for a wider set of benefits. In particular, the scope of impact on values of
surrounding properties has been expanded to reflect recent research and theoretical expectations.
The accuracy of estimates could be improved in many ways, including the following:
•
•
•
•
Better treatment of property value and productivity impacts. The De Sousa
calculations might be reviewed in more depth to resolve some property tax issues. For
example, the current calculation method appears to rely heavily on differences in
property tax rates between the suburban municipalities and downtown Toronto. Would
impacts disappear under equalized tax rates under the amalgamated municipality?
Potential improvements to methodology would focus on differences in property values
between periphery and downtown developments.
Adjust data to common year. Dollar values are drawn from years 1995 to 1999.
Standardizing to the year 2002 dollars (e.g. adjusting for inflation) would provide more
current estimates.
More accurate relationship between property values, tax rates, and factor shares of
rents. There are a variety of economic literatures that may provide better quantitative
relationships than the arbitrary ratios assumed here.
Valuing human life and health. The valuation of health risks at remediation costs is
probably too conservative. Cost based valuation is usually predicated on the assumption
that there is an alternative policy of pollution control that could achieve a similar
Hara Associates
Appendix C - 9
•
reduction. This makes sense for air pollution from transportation – which goes to a
common pool. However, the health gains from the remediation of land only occur when
the land is remediated, and thus should be valued on their actual basis using the wellestablished practices for valuing changes to risk of mortality and morbidity. Value of life
and health may also enter into the calculation of other per kilometre transportation costs.
The original sources for these values were not reviewed for this note, but could be
reviewed in the future.
Valuing Greenfields Saved. The public may put a higher value on saved wetlands then
is captured by gross receipts to farmland. There may be contingent valuation studies,
which place reasonable bounds on the environmental values of individuals.
Hara Associates