Corporate Update

The Queensland Government has released its latest discussion paper as part of the broader review being conducted of Queensland's financial assurance framework (read about the other discussion papers here).

Financial Assurance Review - Providing Surety discusses the proposed revised range of surety that resource authority holders required to provide surety (because they don’t satisfy the requirements to participate in the Rehabilitation Fund) may utilise.

Current financial assurance regime

The discussion paper reports that the current financial assurance regime, comprised of bank guarantees and cash (in limited circumstances), creates significant administrative burden and financial and operational risk for the State. Specifically:

Surety Type

State Issues

Cash security

  1. Cash security arrangements require the consistent use of documentation across all such arrangements
  2. Cash security also put the State's financial assurance at risk in circumstances where the State fails to properly record its security interest on the PPSR

Bank guarantee

  1. Resource authority holders regularly request to negotiate the terms of the template bank guarantee
  2. Bank guarantees require the State to hold and administer the physical documents
  3. Due to the reducing number of banks willing to provide guarantees, the State considers it is exposed to financial risk in circumstances where one of the eligible Australian banks currently providing bank guarantees becomes insolvent

Proposed new forms of surety

In response to these issues, the State is proposing the introduction of what is called the 'modular approach' to third party surety. This will see:

  1. The creation of a scheme manager who will become responsible for determining the amount of the financial assurance required for a resource activity as well as administering and managing the surety scheme.
  2. The introduction of insurance bonds as a possible type of third party surety. Surprisingly, given the issues with the current regime noted above, the State will continue to maintain cash securities and bank guarantees. Resource authority holders will be entitled to use one or a combination of these surety types in satisfying its overall financial assurance requirement. Cash securities will be able to be used more freely than is currently possible.

The key aspect of this regime appears to be the purported ability of resource authority holders to periodically revise their third party surety mix (i.e. by increasing cash security and reducing the amount of its bank guarantee) and reduce the overall quantum of its financial assurance as progressive rehabilitation occurs or if its plan of operations changes.

The cost of the scheme manager is to be borne 'equitably' (and not equally) by all participants in the overall Financial Provisioning Scheme (i.e. including those participating in the Rehabilitation Fund).

Surety types

If the reform is introduced, key characteristic of each type of surety that can be used by a participant allocated to this division will be as follows:

Surety Type

Requirements

Insurance Bond

  1. It must be irrevocable, allow the unconditional and on demand payment to the scheme manager and be governed by Queensland law.
  2. The issuer must be either:
    1. a company authorised under the Insurance Act 1973 (Cth) to carry on insurance business
    2. an issuer not incorporated or regulated in Australia, but otherwise approved in writing by the Treasurer
    3. meet certain rating criteria:
  1. Fitch Ratings with an insurance claims-paying ability rating not less than A-
  2. Moody’s Investors Service with an insurance financial strength rating not less than A3
  3. Standard & Poor’s with an insurer financial strength rating not less than A

Cash security

  1. Cash will be held in an account managed by the scheme manager,
  2. A standard suite of security documents will be established, which will be streamlined for surety obligations of $100,000 or less
  3. Interest earned on this cash will be used to fund rehabilitation of abandoned mines and conduct research into rehabilitation

Bank guarantee

No material changes

Key questions

The key question arising from this discussion paper is how this arrangement will reduce the existing risks and burdens for the State which were the catalyst for the proposed reform, as the proposed changes to the regime appear to us to only increase the State's exposure.

Questions also remain around the introduction and operation of this scheme, including:

  • What is meant by the 'streamlining' of the security documents for cash securities of less than $100,000?
  • What regulatory framework will govern a resource authority holder's ability to revise it surety matrix (i.e. how often, by minimum or maximum amounts etc.)?
  • How fee's will be calculated and levied to ensure that the cost of the scheme manager is equitably met by all participants in the Financial Provisioning Scheme?

Consultation

Submissions to the Queensland Government on the proposed new form of surety arrangements close on 5:00pm Friday 22 September 2017. It is intended that the revised surety regime will apply from 1 July 2018.

Submissions can be made by email or post to: financial.assurance@treasury.qld.gov.au or Financial Assurance Review, Queensland Treasury, PO Box 15216, City East QLD 4002

Further discussion papers

Additional discussion papers related to the broader financial assurance reform in Queensland are due to be released in the fourth quarter of this calendar year.