CMPA Rehabilitation Project

Review of Rehabilitation and Bonds for Quarrying Industry in Victoria (DRAFT).

EHS Support was commissioned by the CMPA to undertake a review of the rehabilitation and bond framework for quarries in Victoria.

In undertaking this review, EHS Support completed a literature review coupled with stakeholder interviews to build a picture of the evolution of the current framework and how it is administered to identify challenges and opportunities. The following is a draft of the Executive Summary.

The quarrying industry has a long and proud history providing
construction materials to build the city of Melbourne and the State of Victoria. The industry contributes materially to the economy of the State with significant employment, support to downstream business, and royalties to local landowners.

The need to rehabilitate a quarry site and the use of rehabilitation bonds to cover any liability for the State have been a long-term requirement of the legislative framework in Victoria. Generally, EHS Support finds the current regulatory system consistent with those in other jurisdictions and appropriate in terms of reach and what is regulated. Rather, the issues for the industry are the uncertainty associated with long review times and inadequate feedback from the regulator and misuse of the bond calculator.

Anecdotally, these issues are linked to a lack of resources in the regulatory department (Earth Resources Regulation, ERR), high assessment officer turn-over, a move away from experienced inspectors who knew the site and operators, the split of the assessment and compliance functions within ERR, and the use of tools such as Google Earth™ to evaluate disturbance quantities rather site visits. Based on prior experience, lack of familiarity with the relevant industry leads to risk-averse administrative decision-making and an increasing burden of proof on operators.

The costs associated with regulation and providing bonds have increased for the quarrying industry over the last few decades and are likely to further increase with the new bond calculator and current view of the industry and bond amounts by the regulator.

Cost increases are challenging the viability of small operators which has a direct impact upon the State. With smaller operators generally being regional, their loss from the industry would drive up transport and raw material costs as materials would be transported a greater distance to support regional campaigns and developments. The impacts extend beyond direct cost with increase travel distance leading to increased accident risk,
increased wear on infrastructure, and increased greenhouse gas emissions all of which have indirect costs.

Rehabilitation bond calculation for quarries in Victoria fails to account for the inherent value of the resource. Where quarries are early in their development with large quantities of remaining resources, the value of the resource and the demand for quarry products, means that should a default occur, it is highly likely another operator would take on the site, significantly limiting any liability for the State.

With the expansion of Melbourne and regional centres, land currently used for quarries is often highly valuable for other uses. Late life quarries have ‘airspace’, which in the increasingly urbanised environment carries a premium.

Land value in Victoria is likely to continue to increase with population growth increasing the for living space, agriculture, generating electricity, and manufacturing.

The proposed end land use for a quarry site must be stated in the
Rehabilitation Plan. In many cases, the base case assumption is returning the land to grade and agricultural use. Considering the development scenarios described above, the assumption of such a use will overestimate the likely rehabilitation costs.

If a different end land use is proposed, the Bond Holder must apply for a Variation to the Work Plan. Anecdotally, such a process can be costly with a lengthy approvals process. We propose a weight of evidence approach should be sufficient to allow a change in the assumptions to the bond calculation for a site without submitting a Variation. A bondholder should be able to point to studies undertaken by the Victorian government and other sources that show, in all likelihood, a different use is reasonable. This would allow a low cost and low effort way to more accurately reflect the
true likely rehabilitation cost when high-cost activities such as backfilling excavations that may otherwise be used for activities such as landfilling, do not need to occur. This has the benefit to government in that it communicates community needs are being acknowledged and that the most sustainable land use is being contemplated.

Progressive rehabilitation is a challenging issue for the quarrying industry. Such rehabilitation is beneficial for all reducing the liability on the State by removing potential work to be undertaken in the event of a default and reducing the operators rehabilitation liability at specific points in time. However, the nature of quarrying is that areas of a site may be made inactive until demand for the product increases again. In such cases, the face will be made safe and stable but not fully rehabilitated. There is a rate in the bond calculator that should be more widely used and recognises that while the land is not fully rehabilitated, work has been done that would reduce the cost to the State if they had to step in.

Considering the mitigating factors discussed in this report including the overall risk of default in the first place (and especially multiple default), the value of remaining resources, and the value of land, the actual rehabilitation liability to the State from the quarrying industry is likely significantly lower than that reported by government. Consequently, the assumption that unrehabilitated sites are a burden to the State is challenged within this report. Further,mining and quarrying are treated in an almost identical fashion in the legislation and in the bond calculator, despite there being clear differences in their risk profiles. Quarrying poses a much lower risk of environmental harm and degradation being typically significantly smaller in scale (e.g. pit footprints and heights) and complexity (e.g. simple processing), extracting benign products (compared to coal for example which has high ignition risk), and generating negligible waste compared to mining with an absence of toxic, hyper-saline, and acid forming materials.

Drawing together the factors which affect the State’s exposure (general risk of environmental harm, stability of current ownership, resources remaining and remaining lifespan) EHS Support proposes the use of a risk filter on the bond calculator.

The filter would account for environmental risk, resources remaining, remaining life, potential value of the partially rehabilitated land (e.g. made safe but not necessarily backfilled), and the risk of operator default to deliver a weighting that would then be multiplied by the bond amount to arrive at a risk-weighted bond value more accurately reflecting the State’s exposure.

A risk score on a scale of 0 to 1 would be applied to each category and those sites where the State’s exposure is greatest would have a multiplier of 1 (meaning that the full estimated rehabilitation liability would be applied). Less exposure risk leads to lower risk-scores. This is a similar approach to the one used by the State to assess its overall contingent liability and broadly aligns with the Queensland approach and its pooled system.

Such a risk-assessment tool will:
• assist the government in better understanding the rehabilitation liability from quarrying and beyond with the information to inform the community, and
• deliver bond valuations that account for the inherent value of the site and resource in a state that is not the final rehabilitated landform.

A broader issue with the bonding system is the form of the bond which is a bank guarantee-based system. The financial institution providing the bond requires cash or assets of equal or greater value than the bond. Cash security is likely to be drawn from after-tax earnings or future investment capital. Cash or assets used as securities cannot be drawn on for other purposes and as a result provision of cash as security sterilises available working capital. For some (especially smaller operators), this represents
a significant barrier to market entry, and for others, it constrains their ability to invest in their operations and may impact their overall viability.

Other Australian jurisdictions have chosen to move from a bond system to a pooled fund (either partially or in full) in recognition of the financial and administrative impost a bank guarantee-based system represents. EHS Support recommends the implementation of a pooled fund. Such a system reduces the financial burden on the industry and benefits government because they can access the pooled funds in the event of a default, rather than just the specific bond for a specific site. It is acknowledged such a move would require legislation change and other recommendations are
preferred in the short term.

A review of the bond calculator indicates the architecture would benefit from simplification to reduce the risk of error and the burden on the user. Based on the experience of specialist practitioners and bottom-up, first principles calculations undertaken for other calculators, some of the rates are higher than would be realised in practice. These rates should be reviewed and reduced. The project management allowance of 10% is reasonable however the 5% monitoring cost should either be reviewed or users allowed to present alternate costs more accurately reflecting what
would occur in practice. The contingency is reasonable to include provided it is understood that it is to cover unknowns such as contamination associated with potentially contaminating activities and poor rehabilitation performance (e.g. seed does not take or erosion occurs).

A bond estimate should not allow for events that are unknown and that have at least as much chance if not more likelihood of not occurring. There is evidence that such instances are finding their way into bond calculations inflating amounts and resulting in an inaccurate estimate of the true rehabilitation liability. At least one example was found for this report whereby a bond amount has increased over 4000% and the operator confirms they have rehabilitated a similar site for an order of magnitude lower cost.

DRAFT Recommendations

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