On 15 September 2021, Queensland Treasury released its annual report for the Financial Provisioning Scheme (FPS) governed by the Mineral and Energy Resources (Financial Provisioning) Act 2018 (Qld) (FP Act). The annual report provides insight into risk outcomes, status of transition, contribution fund and surety balances, and planned expenditure.
- Of the aggregate $7.4 billion of in force estimated rehabilitation cost (ERC) risk category allocation decisions as at 30 June 2021, 81 percent of that exposure has been assessed at low or very low risk of that rehabilitation obligation falling to the State. Less than 10 percent has been assessed at high risk.
- The Scheme Manager primarily exercised their discretion in relation to deciding the entity to be assessed for financial soundness assessment purposes in the context of complex corporate arrangements and their advice emphasised the significance of control as being that point at where recourse is most probable.
- The Scheme Manager has made a recommendation that there not be any change to the Resource Project Characteristics Assessment (RPCA) when reviewed in 2022, as the consideration of the RPCA has made negligible difference to the risk category allocations.
On 1 April 2019, the FP Act commenced to give effect to significant reforms to the financial assurance regime in Queensland, requiring most operators to make ongoing and regular contributions to a pooled fund scheme administered by the Scheme Manager. The Financial Provisioning Scheme (FPS) operates by the Department of Environment and Science making an assessment of the estimated rehabilitation cost (ERC) of mining activities under an Environmental Authority (EA) and the Scheme Manager making a risk category allocation decision. For moderate, low and very low risk category allocations, operators must pay directly into the fund a certain percentage of the annually assessed ERC amount. Where an entity is assessed as holding EAs with aggregate ERC values exceeding $450 million, surety must be provided for the amount exceeding this threshold. High risk assets must provide surety in the form of bank guarantees, insurance bonds or cash equivalent for the entire value of the ERC. The 2020/21FY represented the second full year of operations for the FPS with the transition period ending on 30 March 2022.
FPS Operation and Transition Progress
According to the Scheme Manager’s Annual Report, as at 30 June 2021:
- the aggregate value of ERC associated with all 4,754 resources EAs and small scale mines in Queensland totaled approximately $10.7 billion;
- of the $3.6 billion in ERC risk covered by fund contributions, 80 percent pertained to EAs in the very low or low risk categories which are typically held by entities with significant financial strength;
- net balance of the fund was $61.9 million and the fund is growing in accordance with expectations for the long-term;
- surety provided to date is valued at $6.7 billion;
- 277 risk assessments were completed in the 2020/21 financial year with 152 initial risk category allocations, 5 changed holder reviews and 120 annual review risk category allocations; and
- no claim has been made on the fund.
The Scheme Manager highlighted in their report that the administrative operation of the scheme has been highly effective as no decisions have been subject to judicial review since the scheme commenced. According to the Scheme Manager, the transition is well progressed with 287 transition notices issued representing 76 percent of currently identified assessable EAs. There exists a high degree of confidence that all assessable EAs will be transitioned before 30 March 2022. The FPS is also on track to be fully self-funded from contributions by 1 July 2022.
The Scheme Manager’s review of the FPS highlighted the following main observations regarding risk outcomes:
- exposure is substantially held by investment grade equivalent entities of a relatively low probability of financial default;
- design and operation of the fund is aided by the existence of the $450 million cap on exposure to a single entity’s rehabilitation costs (as after this amount surety is required); and
- while the fund balance will be modest relative to ERC exposure, most exposure has quite low probability of incurring a claim and EAs with the highest likelihood of becoming a claim against the fund account for only a small proportion of aggregate ERC value.
Resource Project Characteristics Assessment (RPCA)
As part of risk category allocation assessments, a RPCA is conducted when an EA is classified as being in production with some remaining economic life. Throughout the transition period, RPCA has had minimal impact on risk outcomes as RPCA has only altered the risk category allocation in a minority of instances compared to if financial soundness holder assessment was considered. While a new RPCA may be introduced at the end of the transition period, the Scheme Manager has recommended that the current RPCA is effective and there is no pressing need to modify the RPCA at the end of the transition. The Scheme Manager considered that introducing matters such as cost curve analysis, overriding risk factors for specific commodity types, end market assessment and macro sector trends would all have imperfections and inefficiencies as compared to the current RPCA.
Transitioning to the scheme has allowed some entities to only provide contributions to the fund rather than needing to provide full surety which has reduced balance sheet liabilities. Some operators have inevitably incurred higher costs given their obligations to contribute to the fund are relatively more onerous as compared to previous surety arrangements. The Scheme Manager broadly considers that the FPS has been effectively implemented and had minimal operational impact on affected entities.
How can we help?
We have assisted several clients with strategy around ERC and risk allocation decisions. Please do not hesitate to reach out to discuss your business’ decisions or the outcomes in this annual report.
The authors would like to thank Tooru Nishido for their contributions to this article.