Projects & Construction
Exacting requirements for the mining industry and an alert for environmental guarantee insurers: the new financial provision regulations under the National Environmental Management Act (NEMA)
The Purpose of the Regulations
The purpose of the Regulations is described as follows:
"…to regulate the determine [sic] and making of financial provision as contemplated in the Act for the costs associated with the undertaking of management, rehabilitation and remediation of environmental impacts from prospecting, exploration, mining or production operations through the lifespan of such operations and latent or residual environmental impacts that may become known in the future."
The publication of the Regulations in terms of NEMA is in line with a move towards 'One Environmental System', and the transfer of all environmental governance law out of the domain of the MPRDA.
Prior to any exploration, prospecting or mining taking place, rights applicants or holders must make financial provision for three things:
Prior to these Regulations, the required quantum for financial provision was determined through reference to Regulations 53 and 54 under the MPRDA, and the Guideline Document for the Evaluation of the Quantum of Closure-Related Financial Provision Provided by a Mine, prepared by the Department of Minerals and Energy (as it then was) in 2005. Although there had been a broad description of the types of rehabilitation and remediation which had to take place, no detail was provided as to exactly what this should entail, what standards should be achieved, and consequentially there was no established bench-mark for the value of a financial provision.
The Regulations now provide more certainty on how to calculate the 'financial provision' required of all mining and prospecting rights applicants or rights holders.
The new Regulations list three plans which must be included in the Environmental Management Programme: an Annual Rehabilitation Plan; an Environmental Risk Assessment Report; and a Final Rehabilitation, Decommissioning and Mine Closure Plan. The minimum contents for each plan are attached to the Regulations as Appendixes 3, 4 and 5. Each activity listed in the plans must be itemised, and the cost of immediate implementation thereof must be calculated. The financial provision (either in the form of a single vehicle, or a combination of vehicles) must, at any given time, equal the sum of the actual costs of implementing the plans put in place by the rights applicant or holder for a period of at least 10 years going forward.
A new component of the Regulations is the provision which must be made for annual rehabilitation (including a minimum requirement for the annual rehabilitation plan), which must take place on an on-going basis (as opposed to waiting until the closure of a mine).
A further (and new) requirement is that the provision made for latent or residual environmental impact must specifically address the pumping and treatment of extraneous or polluted water. Prior to the transfer of environmental governance provisions into NEMA, a mining rights holder's liability ended upon the issuing of closure certificates. NEMA now specifically provides that liability, including the responsibility for extraneous or polluted water, continues after closure. The inclusion of this provision in the regulations setting out how to calculate the financial provision is a clear indication that the quantum of the provision will necessarily increase.
The adequacy of the financial provision must be reviewed and assessed annually. The result of this assessment must now also be audited by an independent auditor, and submitted to the Minister. Any excess must be deferred against subsequent assessments, and any shortfall must be remedied by increasing the financial provision, within 90 days from the date of signature of the auditor's report.
In addition to the requirements for new financial provision, the Regulations require that existing provision be reviewed and aligned with the new Regulations. Such review must take place within 15 months of the Regulations, or within three (3) months of its financial year end. Should the rights holder be unable to meet the revised financial provision, a payment plan may be entered into with the Minister.
A failure to comply with the Regulations relating to the determination, making available, keeping available, and review and required increase of financial provision will constitute an offence, which carries a fine of up to R10 million, or up to 10 years' imprisonment, or both such fine and imprisonment.
The financial vehicles which may be used for financial provision
The financial vehicles which are to be used for financial provision remain the same: contributions to a trust fund; financial guarantees (either provided by banks or registered insurers); or deposits into an account administered by the Minister responsible for mineral resources (the Minister).
The financial vehicles through which an applicant or holder of a right or permit must make financial provision, either individually or in combination, are described as follows:
A proviso to the vehicle of the trust funds, which was previously the most popular choice (being tax deductible), is that a trust fund may now only be used for financial provision relating to remediation of latent or residual environmental impacts which become apparent after a mine's closure. It should also be noted that the envisaged trust fund must be established by a deed of trust in the format set out as an Appendix to the Regulations.
This means that there will now necessarily be more appetite for financial guarantees provided by insurers, since cash flow is a scarce and highly valued commodity in today's mining environment, and bank guarantees and deposits of cash would tie up large sums for the entire life cycle of the mine.
The Financial Guarantee
Financial guarantees must now accord with a standard form, which is Appendix 1 to the Regulations.
The guarantee wording pursuant to which payment is triggered provides
"2. The Guarantor hereby unconditionally undertakes, as a principal obligation, to pay to you the Guaranteed Sum by no later than 2 working days (Mondays to Fridays, excluding weekends and public holidays) after receipt of a written claim from you (or made on your behalf) to do so, which claim:
2.1 must state that the holder of the right or permit:
2.1.1 has failed to execute the plans used to determine the financial provision in accordance with its terms; and/or
2.1.2 has failed to commence execution of the final rehabilitation, decommissioning and mine closure plan or the environmental risk assessment report within 10 working days (Mondays to Fridays, excluding weekends and public holidays) of the earlier of (i) the date on which such commencement is required by law or (ii) the date of written notice to the holder requiring such commencement, in circumstances in which prospecting, mining, exploration or production operations, (as the case may be) have ceased; and/or
2.1.3 has commenced execution of the final rehabilitation, decommissioning and mine closure plan or the environmental risk assessment report but has failed to make adequate progress with execution of such final rehabilitation, decommissioning and mine closure plan or environmental risk assessment report at any time prior to its completion in accordance with its terms; and/or
2.1.4 has become subject to an order of court placing him/her/it in or under sequestration, liquidation or bankruptcy (in any case whether voluntary or compulsory, provisional or final) or any analogous order is granted or resolution taken in any jurisdiction in relation to the holder of a right or permit…"
Claims may be made at any stage commencing from the date of signature of the guarantee, until the guarantee expires upon the issuing of a closure certificate in respect of the whole mine. Payment is also automatically triggered without the need of the above written claim, in circumstances where a financial institution gives notice of withdrawal from the guarantee and the holder of a right or permit fails to put in place an alternative arrangement. All that is required in such an instance is a written notice (see below).
The following observations, which raise concern, are made:
The required financial provision will necessarily increase in light of: the requirement of a very detailed itemisation of the cost of carrying out all planned rehabilitation and remediation; the annual rehabilitation requirements; that sufficient funds must be in place to cover the implementation of plans for 10 years; and the express requirement for post-closure provision for the treatment and pumping of polluted or extraneous water. This will also be so for existing provision because such provision must also be reviewed and re-assessed in order to ensure that it complies with the Regulations. Financial provision will also have to be re-assessed annually, and may therefore increase annually.
The prescribed guarantee is an on-demand guarantee and the established principles in relation to on-demand guarantees will apply. This means that a guarantor undertakes to pay provided only that conditions specified in the guarantee are met. The only basis upon which the guarantor can escape liability is proof of fraud on the part of the beneficiary.
A call on a guarantee triggers an obligation on the Minister to step into the shoes of the right or permit holder and to execute the final rehabilitation, decommissioning and mine closure plan or environmental risk assessment report. The Minister must also, within one year from the date of the payment by the Guarantor, give account to the Guarantor, in reasonable detail, of how the money was utilised. Any portion which remains unutilised must be refunded to the Guarantor, with compound interest at the prime overdraft rate.
On-demand bonds typically provide that payment will not be made unless the original guarantee is presented upon the making of a demand. Two considerations apply here:
This article does not purport to address the Regulations in all their respects. The Regulations are detailed and address important aspects not considered here, for example the responsibilities of a holder of a right or permit, the various powers of the Minister, timeframes relative to consideration of financial provision, plans and reports, care and maintenance and transitional arrangements. Care must be taken to comply with the Regulations as the penalty for non-compliance is substantial.