Queensland resource sector gets a new financial assurance framework

Resource projects in Queensland will soon have a new financial assurance system that includes a pooled financial provision fund and scheme manager – and need to consider how this affects their costs – following the passage (with amendments) of the Mineral and Energy Resources (Financial Provisioning) Bill 2018.

The Bill also makes significant rehabilitation reforms to the Environmental Protection Act 1994, which we will examine in the next edition of Insights.

The new financial assurance framework: the basics

The Bill will replace the current financial assurance requirements for resource activities under the Environmental Protection Act with a new financial assurance framework. The framework includes a pooled Financial Provisioning Fund for projects that meet the risk profile and financial threshold for the fund as determined by a scheme manager, and surety arrangements for other projects.

The objectives of the new framework include:

• to provide a way to manage the risk to the State of incurring costs and expenses if the holder of an authority or small-scale mining tenure does not comply with the holder’s obligations under the authority or tenure; and
• to provide a source of funds to the State for rehabilitation activities, remediation activities and research.

Commencement of the financial assurance scheme is expected to occur in the first half of 2019.

Calculating the contribution of an environmental authority for a resources project

Under the new scheme, holders of an environmental authority (EA holder) for a resources project may be required to provide financial assurance by way of:

• a contribution to the Financial Provisioning Fund; or
• the giving of a surety to the scheme manager; or
• a combination of the two.

The contribution that an EA holder must contribute to the scheme is calculated by multiplying the estimated rehabilitation cost (ERC) for the resources project by a prescribed percentage, determined by the risk allocation made by the scheme manager. The scheme manager must allocate a risk category for each environmental authority with an ERC equal to or more than $100,000 and decide whether to allocate a risk category of very low, low, moderate or high. Participation in the Financial Provisioning Fund is only for EA holders allocated a risk category of very low, low or moderate.

The risk allocation is determined annually by the scheme manager, and annual contributions are required to be made.

The surety

A surety will still be required instead of (or as well as) a contribution to the scheme by the EA holder in certain circumstances, including if a high risk category has been allocated, the scheme manager decides the EA holder must give a surety, rather than pay a contribution, to preserve the financial viability of the Financial Provisioning Fund (despite being allocated a risk category of very low, low or moderate), or the ERC for an authority is less than the prescribed ERC.

Further, the scheme manager will require both a contribution to be paid and a surety given if the ERC for activities under the EA is more than the fund threshold. In this situation, the surety will be for the amount by which the ERC exceeds the fund threshold.

Like the amount contributed to the Financial Provisioning Fund, the surety is calculated by reference to the ERC for the activities permitted under the EA. A surety can be provided as a bank guarantee, insurance bond, or a cash payment, which is a wider range of acceptable sureties than provided for under the existing financial assurance guidelines.

Fleshing out the new financial assurance framework: draft Regulation and Guidelines

The new scheme, as established under the Bill, will be further supported by a Regulation and guidelines.

The Draft Mineral and Energy Resources (Financial Provision) Regulation 2018 gives effect to the Bill's financial provisioning scheme. Amongst other things, the regulation will prescribe the percentages to be used for calculating the contribution to be paid to the scheme by an EA holder (as outlined above). The prescribed percentages under the Draft Regulation are:

• 0.5% for an authority allocated to the risk category of very low;
• 1.0% for an authority allocated to the risk category of low; or
• 2.75% for an authority allocated to the risk category of moderate.

Several Draft Scheme Manager Guidelines have also been released (but not finalised). These Guidelines must be taken into consideration by the scheme manager when making a decision such as allocating a risk category. There are guidelines on forms of surety, assigning an authority to a relevant holder and forming the Scheme Manager's opinion.

A new ERC Guideline is being created to support the new scheme. The existing guideline, "Financial Assurance under the Environmental Protection Act 1994" is currently being amended to cover only financial assurance arrangements for prescribed environmentally relevant activities.

Separate guidelines are being developed to support the rehabilitation reforms.

Transitioning existing financial assurance to the new scheme

The Bill includes transitional provisions to assist in moving to the new scheme. All existing financial assurance for resource activities will be taken to be given as a surety under the new scheme for the transitional period.

Furthermore, an initial allocation decision is not required until the scheme manager gives the relevant EA holder a transition notice, which must be given within three years of commencement. The transition notice must state that the scheme manager intends to start making an initial allocation decision for the authority and the day on which the scheme manager intends to start making the initial allocation decision notice. However, until the scheme manager makes an initial allocation decision, the EA holder must give a surety for the authority in the amount of the relevant ERC. As stated in the Bill's explanatory memorandum, this ensure that financial risks to the State are covered during the transition period. 

What it means for you

The commencement date for the new financial assurance scheme is not yet known.  For existing operators, it will be important to determine the likely costs of entering the scheme, including whether operators would qualify for the pooled fund.  For those operating with discounts for financial assurance, those discounts will no longer apply.