FROM THE CMPA SECRETARIAT (Issue 53)

Bonds a Miasma of Uncertainty

The foundation of the CMPA in 1999 was largely built on the egregious nature of rehabilitation bonds imposed on the industry at the time. However, some 10 years down the track, it seems little has changed.

A recent CMPA submission to the Victorian Competition & Efficiency Commission (available at www.cmpavic.asn.au) highlights the insidious bond position many quarry owners still find themselves in – managing bonds that are set at unfeasibly high levels.

A chasm between a reasonable bond level and actual bonds is driving capital investment from the industry and breaking businesses.

Recent reassessment of bonds for several sites highlights the murkiness of calculation.

A letter to one operation noted ‘a recent review of the operation’ was the basis for revising the bond from $480,000 to $2.9 million – an increase of 504%. And that’s not an isolated example. Another small site had a bond set in 2005 at $12,000 with a recent review by the DPI proposing this be increased some 550% to $78,000.

Another review at another site proposes a bond increase from $40,000 to $116,000, and yet another $12,000 to $187,000. There is little doubt the Department’s approach will devastate many operations and have a profound impact on those that do survive.

The bond review formula has been found wanting from these examples.

These bond review outcomes are not maintainable and changes must be urgently undertaken. Many of our businesses will have to consider their future in our industry if this does not occur.

What must be at the core of the bond formula is that it is fair, just, and reflective of common sense. It must not restrict entry, force resources to be steralised or force existing owners to exit the industry.

One of the cases above has resulted in the owner cancelling substantial upgrades to the crushing plant, even though the final bond figure has not yet been agreed to.

We have been reminded ad-nauseam that the process is needed to address the risk a failed Work Authority presents to the Department. To this end, it is worth reviewing the last 20 years of activity by the government to rehabilitate sites in the extractive sector.

Only five sites have had funds allocated to them of the hundred plus Work Authorities that have closed. At those five sites a total of only $18,000 has been spent. This is to the credit of our industry and all those who work within it and manage it.

It is obvious that there is a risk of failure, and this goes for all things in life. It is only proper that the risk be recognised and managed in a way in which our industry is not damaged.

This concern is highlighted in the fact that over the last decade the value of rehabilitation bonds across the industry increased 184% while inflation increased by43% by comparison.

In other words, over the last 10 years, we have lifted the bond level from $22 million to $65 million and the industry has foregone in excess of $34 million of interest in this period, not to mention the cost of funding and lost opportunity.

Just expanding the rehabilitation bond levels to cover the perceived risk as reflected in the current bond formula is not the answer.

Any existing or recently terminated Work Authority requiring government intervention, would see the bond most likely be insufficient for the works required at any rate – with a shortfall that could be up to ten fold.

We need to also consider addressing the issue of a cataclysmic failure of a Work Authority that results in the owner walking away and no party interested in acquisition. This is an extremely rare event – but it has happened in the past and it will most likely do so again.

These events require all parties involved to take some responsibility as it is foreseeable. Good contact at the Work Authority level would a palatable exit strategy.

To understand the risk, it would also be beneficial for the DPI to advise the industry on what constitutes failure, and the procedures they would put in place leading up to a Work Authority failure in order to achieve the best final outcome.

From a Work Authority holder’s perspective, a range of triggers could bring about the demise of our businesses, many of which are outside of the individual’s control.

Some of these are not entirely catastrophic as this business would remain saleable. They range from:

• Poor business decisions including lack of working capital (not catastrophic)
• Work Authority owner’s death (not catastrophic)
• Handing in of a Work Authority (potentially catastrophic)
• Market failure due to import, competition and changing technologies (catastrophic, but planned exit possible)
• Resource failure due to deteriorating quality or exhaustion (catastrophic, but planned exit possible)
• Resource sterilisation due to encroachment (catastrophic, but planned exit possible)
• Resource sterilisation due to changing legislation (catastrophic, but planned exit possible)
• Removal of rights of access (catastrophic)
• Resources identified as having risks which make it unsuitable to operate (catastrophic)

It is clear to see that a Work Authority failure involves different levels of risk depending on the trigger for that failure.

No two Work Authorities are the same, and as such a ‘one formula fits all’ Government approach as presently stands, is flawed.

If there has ever been the need for a review of a system that has spiraled out of control, then this is it. The CMPA has been banging the drum for 10 years now, is there any chance anyone will listen?

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