Creativity has been a long-standing necessity when it comes to the development and operation of resources projects driven largely by capital intensity, the need to appropriately allocate risks and responsibilities and infrastructure and innovation requirements.
This necessity has been the mother of various forms of engagement as between project proponents in order to deliver outcomes for Resources companies looking to establish and develop their projects. Legally, such arrangements often take the form of joint venture agreements, farm-in or farm-out agreements, convertible notes, prepayment, offtake and royalty arrangements.
However, included among these arrangements are agreements governing the co-ownership and/or common use of project infrastructure.
This type of dealing has been especially helpful to kick start Australia’s new critical minerals boom. It is clear that proponents in the critical minerals industry are taking lessons from the coal, iron ore and gas industries, who have a long history of success in constructing, owning and operating shared infrastructure.
As external pressures mount, such arrangements are still being employed but through the lens of project sustainability, as compared to project establishment. Whilst competition within the industry is now an issue lower down the priority list, parties are coming together and looking to manage infrastructure costs in conjunction with their ongoing focus on managing regulatory requirements and financial pressures caused by fluctuating commodity prices, income growth and royalty hikes.
However, sophisticated asset sharing arrangements within the coal, iron ore and gas industries has several hurdles, particularly when it comes to allocating risk and responsibility for shared liabilities. In our experience, particular regard should be had to the following sticking points:
Legislative obligations - Investment approvals (ACCC and FIRB)
Whilst infrastructure sharing is not a standard investment structure, these arrangements often result in a lessening of competition and a form of ‘profit share’ which may be caught within the ambit of legislation governing investment. Parties should therefore assess whether this legislation applies to the proposed transaction, including whether either or both parties should seek approval under the Australian Competition and Consumer Commission and the Foreign Investment Review Board in respect of the arrangement.
Legislative obligations - Tenement and environmental
The tenement holder will always remain liable to the State with respect to its obligations as holder of a mining lease and associated environmental approvals. If infrastructure sharing arrangements involve a counterparty utilising the rights granted under a tenement or environmental approvals (or both), the parties should ensure those rights are available under the applicable legislative regime and also seek approval from the governing body, as required prior to the grant of such rights to the counterparty. Parties should also ensure that there are appropriate contractual indemnities to recover damages from a counterparty where a claim is made against a tenement holder for losses caused by the other party. It is also important to ensure that the counterparty has sufficient financial standing to meet such claims and, where this is questionable, seek comfort in the form of a security bond, parent company guarantee or other form of security arrangement.
Sharing arrangements - individual commercial drivers
Infrastructure sharing arrangements differ from standard investment structures in that there is no common goal to achieve profit for the benefit of both parties. Given this, parties cannot rely on fiduciary or other common law good faith obligations or protections under the Corporations Act with respect to their dealings with each other. Rather, parties will need to specifically and carefully describe the processes and expectations of their arrangement, bearing in mind their own commercial drivers and risk profile.
Management committee or other governing body
Infrastructure sharing arrangements are often long-term arrangements and can be logistically complex. To assist with the governance of these arrangements the parties should consider establishing a management or steering committee to be responsible for the operation of the arrangements on a day-to-day basis. The infrastructure sharing agreements should set out the details as to the composition of the committee, frequency of meetings, types of decisions and thresholds for approval.
Assignment
Infrastructure sharing arrangements are bespoke and specific as between the parties to each respective agreement. To ensure mutual rights are maintained, parties should consider the circumstances in which the other is able to assign their interests in the negotiated infrastructure sharing agreement (in particular, ensuring that the other party can’t alienate their rights by assigning the underlying asset (or their interest in such asset) without also assigning the infrastructure sharing agreement).
Tax
From a tax perspective, there are a number of key considerations for parties to an infrastructure sharing agreement. One such consideration is to ensure that the agreement appropriately reflects the ‘ownership’ of the asset and the intention of the parties with respect to the availability of deductions for Division 40 or 43 expenditure.
Another factor to consider is to ensure that there is no risk of the parties to the arrangement conducting their activities in partnership in respect of their infrastructure sharing arrangement (by virtue of any ‘sharing’ of profit from the arrangement), which carries the risk for them of joint and several liability as well as various compliance implications - but are rather joint venture parties with respect to the arrangement. Parties should also carefully consider any potential revenue law consequences (e.g. CGT events and stamp duty) triggered on grant of rights under an infrastructure sharing arrangement.
