REHABILITATION BONDS – STILL BROKEN

Prepared by the CMPA SECRETARIAT -–The systems in place governing construction material rehabilitation bonds continue to cause our Members a great deal of concern particularly considering that the Regulator currently holds over $105 million in bank guarantees. This article looks at the history of the issue and specifically why a review is necessary.

HISTORY

The inception of the CMPA in 1999 came about primarily as the industry was concerned about rapidly increasing rehabilitation bonds and secondarily as regional and smaller businesses needed to be recognised by government.

At that time, the concern about bonds was triggered because in June 1996 $5 million was held whilst by June 1999 $20.20 million was held by the Minister. Since that point the CMPA has continuously raised concerns with the government, always being advised that the commercial impact of tool was coming to an end. Clearly this has never been the case with over $105 million presently being held by the Regulator. This is despite only $18,000 being spent by the Government on rehabilitation of construction material processors’ sites over the last 20 years – a fraction of the level of funds being held!

COMMERCIAL RISKS NEED TO BE RECOGNISED

The CMPA proposes that the Minister needs to better recognise the commercial realities faced by construction material Work Authorities and consider ways to reflect these realities in the legislation and methodology by which it establishes a rehabilitation bond.

Below we have identified those risks we feel have been most poorly considered:

• The Minister must recognise that the land owner has entered into an agreement being fully aware of the risks. An amicable commercial arrangement is always established between the land owner and the prospective Work Authority holder allowing access through and to the resource as well as financial compensation for those resources under the land title.
• There is a commercial value in an extinguished Work Authority area which may include fill, pondage, environmental, commercial or residential. Likewise, there is a commercial value for un-rehabilitated land for other uses such as a newly issued Work Authority or commercial opportunities (e.g. clean fill).
• There is a growing case to suggest that the Minister may not in fact be able to access the land to carry out rehabilitation works if the land owner is not supportive of this.
• The rehabilitation works which could be carried out in the event of a failure may result in the sterilisation of viable resources or devaluation of the land through the reduction of airspace both of which could adversely impact the value of the land owner’s asset.
• Commercial failure of a Work Authority holder is not a planning issue. It is a commercial matter to be settled between creditors, including the land owner, and the Work Authority holder.

Existing impact upon small business and competition

As touched on previously there are of course a number of impacts upon the construction material Work Authority holder. These are restricting entry too and forcing the exit of, small to medium players from the market and include:

• The double sterilisation of working capital (i.e. bank guarantee and payment for rehabilitation works) is imposing financially impossible burdens upon operators.
• The ability of the land owner (if not Work Authority holder) to extract unethical value before signing off with the Department on confirmation of rehabilitation works prior to closure of the Work Authority.
• The slow release of bank guarantees once approved for release.
• Creation of an outcome where working capital is being sterilised as a bank guarantee.
  • The reduction in the balance sheet value of the business as a perceived liability (bond reassessment) is forced upon Work Authority holders and can drastically change the relationship between the Work Authority holder and their lender.
  • Sterilisation of earning capacity of working capital (E.g. same asset could be used to secure crushing plant/equipment which would make a return on investment within a reasonable period of time, vs. absolute sterilisation of the same asset through the bank guarantee.)
  • Violent adjustment to the rehabilitation bond assessment resulting in financial institution contracting its support.
• Bank charges and set-up fees applied for adjusting/varying bank guarantees.
  • Bank security supported by assets up to 1.5 times the value in metro area and 1.7 times the value in regional areas. (e.g. $200,000 in bank guarantee equals $340,000 in land and building security).
  • Up to a 2.5% charge applied to Work Authority holders by banks on an annual basis for facilitation of the bank guarantee.

Unfair Process

The MRSD Act increases the rehabilitation liability of sites by:

• Taking a one-size-fits-all approach with an assessment tool taking on the risks associated with mining – it does not reflect the significantly lower risks attached to extraction for construction materials.
• Having no requirement of the Minister’s determination that his estimate must be the cost of rehabilitation.
• Having no process for appeal of the Minister’s determination (i.e. disputing rehabilitation bond liability).
• Not having to return the bond until satisfied that it meets the requirement of 78A and the rehabilitation bond is likely to be successful.

The bond system consists of a one sided assessment tool that only reflects the perceived liability of a site in the opinion of an individual officer. It is not scientifically based nor does it take into account any adjustment in the quality of the asset or underpinning evidence reducing liability.

The tool is counter productive to generating an ongoing rehabilitation program where management and contingency fees of up to 29% are applied in addition to the total calculated liability of rehabilitation are being sought in advance.

Finally, of most concern to the CMPA is the fact that no Business Impact Statement or Regulatory Impact Statement has been undertaken to support the bond calculator nor has the necessity of and functionality of the tool been developed by appropriately trained persons (i.e. risk assessors). This means (among other things) that:

• Unreasonable commercial advantage is given to multi bench quarries as against single bench operations as they only need a partially rehabilitated or battered upper bench. All other benches pick up limited to no liability.
• Terminal and non terminal faces are included in the same liability formula. The formula does not identify commercial opportunities to input clean fill to address perceived liabilities.

It is obvious that the quantum of bond funds extracted from the industry is vastly disproportionate to the risk exposure of the Government and clearly this means the assessment of bond levels is completely inappropriate and needs fundamental reform.

The current rehabilitation bond system is unfairly impacting on our Member’s construction material processors’ businesses. What is quite clear is that the current rehabilitation bond system must change. The first and foremost change required is to put in place a fair and equitable assessment process of the Minister’s liability for our industry.

The CMPA will continue to work with the government on this issue, and we always welcome our Member’s contribution. So next time your rehabilitation bond is reviewed, please contact the CMPA Secretariat.

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