Mon, May 20, 2024

The official Financial Regulation Journal of SAIFM

Overhaul of financial provision regime takes a step in the direction of legal certainty

Sandra Gore and Alecia Pienaar

The publication of the Financial Provision Regulations for Prospecting, Exploration, Mining or Production Operations by the Minister of Environmental Affairs on 20 November 2015 (2015 Regulations) was met with significant resistance, with the Chamber of Mines noting that it would have a “crippling effect” on the mining sector. 

The mining sector had to grapple with the near insurmountable task of having to, within a relatively short transitional period, comply with unnecessarily onerous regulations riddled with legislative uncertainties and a myriad of contradictions.

Amidst a fragile mining industry, the 2015 Regulations (not surprisingly) became the subject of judicial challenge. Two mining companies instituted an application in the High Court for an order determining the legality, constitutionality and/or meaning of the 2015 Regulations. However, on 9 September 2016, before the application was heard, the Environmental Minister published Proposed Amendments to the 2015 Regulations and, on 26 October 2016, extended the transitional period of two years in the 2015 Regulations – giving mining companies until 19 February 2019 to comply.

Despite the additional breathing space and attempts by the Department of Mineral Resources to offer some clarification, be it by engaging directly with the industry or through publication of “explanatory” notes, the 2015 Regulations continued to be widely critiqued for their regulatory uncertainties and absurdities.

Inevitably, following two years of regulatory uncertainty, an overhaul of the financial provision regime for the mineral and petroleum sectors has finally been proposed with the publication of a new set of Proposed Regulations pertaining to the Financial Provision for Prospecting, Exploration, Mining or Production Operations by the Environmental Minister on 10 November 2017 (2017 Proposed Regulations).

Some of the criticism levelled against the financial provision framework has been considered, as various nuances seem to have been addressed in the 2017 Proposed Regulations, particularly:

The 10-year requirement for financial provision availability

Under the 2015 Regulations a holder must ensure that the financial provision required was, at any given time, equal to the sum of the actual costs of implementing the annual rehabilitation plan, closure plan and environmental risk report in relation to annual rehabilitation (Annual Rehabilitation); final rehabilitation, decommissioning and closure at the end of the life of operations (Closure Rehabilitation); and the remediation of latent or residual environmental impacts which may become known in the future, including the pumping and treatment of polluted or extraneous water (Future Rehabilitation) respectively. This has now been significantly reduced to three years for holders of mineral rights obtained prior to the commencement of the 2015 Regulations and one year for applicants or holders of rights applied for or issued after the promulgation of the 2015 Regulations or 2017 Proposed Regulations;

The limitation on using trust funds for Future Rehabilitation and misalignment with the Income Tax Act, No 58 of 1962 (ITA)

The current provisions under the 2015 Regulations are severely problematic. Funds currently held in existing trusts established under s37A of the ITA (s37A Trust) could not be withdrawn from a s37A Trust to secure an alternative financial vehicle for Annual or Closure Rehabilitation, as this would have constituted a contravention of s37A(1)(a) of the ITA. This is because the ITA only allows such withdrawal for purposes of direct expenses relating to rehabilitation upon premature closure, decommissioning or closure (that is, actual rehabilitation). Contravention of this section could result in SARS including an amount equal to twice the market value of funds held in the s37A Trust as a taxable income penalty. This was aggravated by subsequent draft amendments to the ITA proposing an even more stringent penalty for withdrawal of funds for purposes other than actual rehabilitation. The limitation also precluded mineral rights holders from the tax benefits of using a s37A Trust for Closure Rehabilitation. Thankfully, no restrictions on the use of rehabilitation trust funds have been included in the 2017 Proposed Regulations.

Financial provision for rehabilitation

Financial provision is only required to be made available for Closure and Future Rehabilitation, and not for Annual Rehabilitation. It is understood that OPEX will likely be used to fund Annual Rehabilitation costs; and

The care and maintenance provisions have been removed

This is, to some extent, unfortunate. The provisions were ultra vires insofar as it was not within the Environmental Minister’s competence to regulate: (i) when a mine is operationally considered to be in care and maintenance; or (ii) the submission and approval of care and maintenance applications, which is within the Minister of Mineral Resources’ competency. This is particularly so as there is already a procedure in the Minerals and Petroleum Resources Development Act, No 28 of 2002 (MPRDA). Furthermore, the environmental management of a mine under care and maintenance differs from what is required when it is operational. The 2015 Proposed Regulations included the requirement for the submission of a care and maintenance plan. With the deletion of these provisions, the environmental management of mines under care and maintenance is again not thoroughly regulated.

Although the above changes do add a much-needed level of certainty to the financial provision regime, the 2017 Proposed Regulation still place an administrative and financial burden on the mining industry. When the 2015 Regulations were promulgated, they were critiqued for putting too much strain on the sector due to stringent requirements relating to the costs of post-closure pumping, and treatment of polluted and extraneous water during Future Rehabilitation – something that was not required under the MPRDA. Despite this being estimated to double rehabilitation liability, these provisions do not appear to have been relaxed.

The 2017 Proposed Regulations also introduced various new noteworthy changes, some of which include:

  • distinguishing between new and existing mining operations in the methodologies for the determination of rehabilitation and cost closure liability;
  • introducing “rehabilitation companies” as a financial provision mechanism. This, however, goes beyond what constitutes “financial provision” in terms of the 2017 Proposed Regulations’ empowering statute: the National Environmental Management Act, No 107 of 1998. As such, its definition of “financial provision” will have to be amended to cater for rehabilitation companies;
  • prohibiting the use of financial guarantees for Future Rehabilitation;
  • financial provision must be apportioned to each right and permit where a mineral rights holder is in possession of multiple rights or permits;
  • the determination, review and assessment of rehabilitation and cost closure liability need not necessarily be undertaken only by a specialist but may be done internally by an applicant or holder, subject to external review by an independent specialist. The cost of appointing specialists was one of the criticisms of the 2015 Regulations;
  • applicants for consents under s11 and s102 of the MPRDA are now also required to determine and provide financial provision prior to these consents being granted. Understandably, the introduction of this requirement has been met with criticism, as such a requirement unduly forces a mineral rights acquirer to provide financial provision prior to taking transfer of the right; and
  • separate report templates and an extended transitional period are provided for holders of offshore, oil and gas exploration and production rights, who will only be required to comply by 19 February 2024.

The above provisions are by no means final but the complete proposed overhaul does provide some comfort to an industry fraught with regulatory challenges and uncertainties.

Finalisation of the 2017 Proposed Regulations must be prioritised, as existing holders are presently still required to comply with the 2015 Regulations by February 2019.

The mining sector needs to be able to ensure the legality of their operations, as compliance is essential to successfully apply for and retain mineral rights. Although technical and practical difficulties are bound to creep in, the 2017 Proposed Regulations are a definite step away from the disarray of the 2015 Regulations. It is likely that the burden of the costs for Future Rehabilitation will, however, remain contentious.

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