The Queensland Department of Environment and Heritage Protection (EHP) can require that, as a condition of an environmental authority (EA), the EA holder provide financial assurance before the authorised activity is carried out. The financial assurance acts as security for the EA holder’s compliance with the EA and to cover the costs EHP might reasonably incur to prevent or minimise environmental harm or rehabilitate the environment as a result of carrying out the authorised activity.
For some time, it has been acknowledged that a significant gap exists between the total financial assurance held by the State and the estimated cost of rehabilitating the environment in relation to the undertaking of resource activities. Combined with the cost uncertainty and regulatory requirements around achieving successful rehabilitation requirements, rehabilitation in Queensland has not been occurring so that an EA holder’s (and the State’s) security risk can be minimised or discharged.
In July 2016, the Queensland Minister for Environment and Heritage Protection announced the government was reviewing and assessing a range of possible financial assurance models for mining activities which would ‘achieve a high level of environmental performance, protect taxpayers, continue to present an incentive to investment and provide an outcome that satisfies community expectations’.
On 4 May 2017, detail of the proposed redesigned financial assurance framework – the a view to finding a ‘tailored solution’ for resource industry stakeholders was made available in a discussion paper jointly released by various Queensland government departments. The potential financial assurance regime – which is part of a broader review being undertaken by the State to achieve a tailored solution for various types of operators within the resource sector– aims to encourage ‘best practice’ environmental outcomes, deal with residual risk issues and to reduce the State’s risk in the event of environmental obligations not being met.
Existing Financial Assurance Requirements
Under the Environmental Protection Act 1994 (Qld) (EP Act), EHP may impose a condition requiring a financial assurance if EHP is satisfied the condition is justified having regard to the:
- degree of risk of environmental harm being caused (or that might reasonably be caused) by the undertaking of the activity;
- likelihood of action being required to rehabilitate or restore and protect the environment because of environmental harm being caused by the activity; and
- environmental record of the EA holder.
While EHP is responsible for deciding the amount and form of financial assurance required under an EA condition, detail as to how a financial assurance is calculated and quantified and the type of security acceptable to EHP is not stated in the provisions of the EP Act itself, but is left to detail in EHP’s guideline (Guideline).
While determining the amount of the financial assurance to be provided can prove to be a complex process (and is not necessarily a process which EA holders and EHP are always in agreement about), the Guideline clearly states that EHP’s policy position:
- requires a financial assurance to be a financial institution’s undertaking in the form of an unconditional, irrevocable and on demand guarantee; and
- provides for cash payments in limited circumstances, subject to approval by the department.
The recent announcement shows that the State is contemplating a tailored, risk based approach to the provision of financial assurance which acknowledges that for the resource industry, a ‘one size fits all approach’ to security does not provide flexibility and optionality for the different types of resource operators in Queensland. The reforms contemplate the provision of security by one of the following options:
Third Party Surety
Select Partner Arrangement
It appears that this fund – similar to the West Australian Mining Rehabilitation Fund – is to enable mining proponents who are eligible to join, to pay contributions to secure their rehabilitation obligations so that other forms of third party surety are not required.
Payment into the fund will enable EA holders to surrender existing bank guarantees (or any other surety) and, in the event that an operator’s rehabilitation obligations are not met, funds from the pool can be used to pay for the costs associated with environmental restoration.
Any interest accrued on money within the fund could also be applied to paying for rehabilitation and restoration works on any abandoned mine projects.
The surety can be provided by way of cash collateral or an irrevocable, unconditional, payable on-demand surety (by bank guarantee or bond).
In addition to the existing financial assurance options, the use of surety – by way of a bond underwritten by an insurer, as opposed to a financial institution - provides security to the State and provides a line of credit (and liquidity) to the mining operator so that funds are not tied up in securing the obligation by bank guarantee or cash.
Surety bonds can be ‘evergreen’ and provide security to the State in that it they can be called upon at any time an EA holder does not meet specified obligations.
The use of surety bonds has already been adopted in New South Wales and for operators, the cost of obtaining this security has proven to be at, or below, the costs associated with obtaining a bank guarantee.
In this scenario, after a risk assessment has been undertaken and the mining operator has been assessed as not being suitable for inclusion in the pooled fund (because they are ‘significant resource entities’) or cannot otherwise secure third party surety, the State may decide to bear the risk of the operator, for a contribution rate.
Various controls, monitoring and oversight for companies in this sector are proposed.
Funds generated under this option are to be re-directed towards resource-related initiatives, including an enhanced scope of works in relation to abandoned mines.
The Queensland reforms are unique in comparison with other Australian jurisdictions in that more than one security option is contemplated across the resource industry and the possible financial assurance options available to individual mining proponents is driven by that operator’s individual risk profile.
The proposed reforms around financial assurance framework for resource projects forms part of a whole ‘beginning to end of mine life’ reform which is being undertaken by the State to provide – among other things:
- more certainty and incentives around rehabilitation and progressive rehabilitation requirements, particularly for certification and discharging EA obligations;
- making self-assessment reports publicly available and projects being audited on a regular basis;
- more rigour around ‘care and maintenance’ obligations for mining projects;
- funding options for abandoned mine programs and projects; and
- developing more calculation certainty and funding options to satisfy rehabilitation and residual risk obligations.
The Queensland Government is seeking feedback on the proposed ‘financial assurance tailored solution’ and the reform framework by 15 June 2017.
The government proposes to progressively release additional discussion papers providing detail of the wider reform issues during the course of 2017 and 2018 - at which time we additional opportunities should arise to provide submissions and feedback on particular reform matters.
The review being undertaken in Queensland is in addition to the ongoing Commonwealth Senate inquiry by the Environment and Communications References Committee into the rehabilitation of mining and resource projects. The report from the Committee is expected in August 2017 and is to consider, among other things, adequacy and transparency in the provision of financial assurance