6. Recommendations and Conclusion
6.5 Proposed alternative financial security system for mine closure and site rehabilitation
6.5.2 Option 2 – Introduction of the Mining Security Fidelity Fund (MSFF)
Another alternative option for the South African financial security system is for the government to adopt and establish a Mining Securities Fidelity Fund606 (hereafter MSFF).
The MSFF will be ‘structured as a fidelity fund whereby the Government is able to claim the cost of rehabilitating a mine site when a company has defaulted on its obligations to rehabilitate, but only after reasonable compliance options have been explored.’607 In terms of this option ‘mining companies will be required to contribute a non-refundable amount to a central fidelity account (a Mining Security Fidelity Fund) managed by the government.’608 This model completely replaces the requirement for each mining company to maintain a bank guaranteed UPBs, or to establish a trust fund or to provide a bank guarantee.609 Each mining company would be required to fund their own rehabilitation and closure costs. Such a fund would accumulate over time and be used by the government to meet the occasional failure by a company to meet its mine rehabilitation and closure obligations, and would also be used to fund the negative legacies of abandoned mining sites. This model will mean that ‘if the government was required to use these funds to undertake closure of a mine site due to the
603 Ibid.
604 Ibid.
605 Ibid.
606 This fund is similar to the one that is currently in use in Western Australian (MRF).
607 Cement Concrete & Aggregates Australia “Submission on the Mining Security System: Preferred Option Paper” (2011) CCAA, available at; http://59.167.233.142/industry/documents/2011-05- 13%20GH%20CCAA%20Submission%20Preferred%20Option%20Paper%20-%20Final.pdf (accessed on 15 January 2017).
608 Ibid.
609 Ibid.
116
inability of an operator to do so, then the overall industry is funding this cost and not the government’.610
6.5.2.1 Advantages of adopting the Mining Security Fidelity Fund
This option presents advantages for mining industry, the community and the government. The fund will enhance the State’s capacity to manage and rehabilitate abandoned mines, leading to better environmental and community safety outcomes.611 The MSFF will be structured to cover the mine closure and site rehabilitation costs which are likely to be borne by the government.
a. The advantage of having all resource activity operators participating in the pooled fund means that the money held by the South African government accumulates faster and the risk that an insufficient amount is held in the event of a large claim dissipates more quickly.612
b. It also means that the South African government would administer only one system enabling a more simple and easy to understand process as well as keeping administration costs to a minimum.613
c. The MSFF approach provide a lower cost alternative to UPBs, and will also provide a perpetual fund to address historical abandoned mine sites. Therefore, the MSFF is likely to present cost savings (compared to UPBs) for South Africa as it has a high number of sites and historical legacies.614
d. This option spreads the risk of default across the mining industry. It shares the risk of any one mining company defaulting on its rehabilitation obligations across many contributors.
e. This option is also cheaper in that the contributions made by mining companies is significantly cheaper than the costs of maintaining a bank guaranteed unconditional performance bond for most operators.
f. A significant financial advantage for operators is that the fund will be open to any mining company (unlike bank guaranteed unconditional performance bonds or insurance policies,
610 Ibid.
611 “The new system encourages early rehabilitation and will provide a mechanism for the state to rehabilitate abandoned mine sites in the event that a company defaults on its obligations, which is a win-win for the sector and the environment as it frees up valuable funds at the start of projects and encourages ongoing rehabilitation.
The new fund provides a more flexible and cost effective system for industry,”
612 Queensland-Department of Environment and Heritage Protection ‘Reform of Queensland's Financial Assurance System: Consultation Report on Discussion Paper’ (2014) Department of Environment and Heritage Protection 5.
613 Ibid.
614 South Africa may be an appropriate candidate with a relatively large number of mine sites, and abandoned mines and in 2012 the number of abandoned mines was estimated to be around 6,000 with the South African government left holding the mining rehabilitation legacy.
117
where some operators may be refused credit), and there is no requirement for operators to provide “cash backing” for the equivalent of their full closure costs.615 This will have a positive impact on the capital available to mining companies, which is particularly important in the early years of development, before full production is reached.616
6.5.2.2 Disadvantages of adopting the Mining Security Fidelity Fund
It is important to note that there is no regulatory system that is 100 percent perfect and without flaws. Even the Western Australian innovative approach in establish a similar option of the MRF has its disadvantages that should not be overlooked. In deciding whether to adopt the MSFF the government should consider the following disadvantages.
a. The establishment and adoption of the MSFF can be an open invitation for defaulting mining companies or defaulted companies to cut and run from their closure obligations.
b. Where there are punitive measures for mining companies that fail to make the required contributions the MSFF will therefore provide no incentive for meeting mine closure objectives and a lack of consequences for not meeting them.
c. It is unclear how quickly the funds can be generated. There is no clear time frame on investments, returns and the allocation of funds for works. Like other mechanisms for rehabilitating legacy sites, it could simply fail to move into action.
It is important to note that for the MSFF to be effective it must be supported by robust legislated punitive provisions (both criminal and civil) against mining companies who fail to comply with their rehabilitation obligations. The MSFF should be established and adopted as a ‘response to a potential increase in ‘unfunded’ rehabilitation liability for mines that became abandoned, while also providing a funding source to address historical or ‘legacy’ mines in South Africa’.617 Therefore, the adoption of the MSFF will ensure that the government and the taxpayers will not be called upon to fund the mine closure and site rehabilitation for mining operations that may become abandoned in the future. Also, the interest earned on the fund can be used to rehabilitate historical abandoned mine site as this will be a perpetual and perpetual fund for the rehabilitation and management of historical abandoned mine sites.618
615 ‘Policy Options for mining securities in Western Australia: Discussion Paper (note 592 above).
616 Ibid.
617Australian Government-Department of Industry, Tourism and Resources ‘Mining Rehabilitation Fund–Yearly
Report’ (2016) DMP, available at:
http://www.dmp.wa.gov.au/Documents/Environment/Mining_Rehabilitation_Fund_(MRF)_Yearly_Report_201 6.pdf (accessed on 17 January 2017).
618 Ibid.
118 Chapter Seven