South Africa adds legislation

New financial provision regulations promulgated for mining in South Africa

Recent changes to the laws on the financial provisions that need to be made for the future closure and rehabilitation of mining operations represent a major step in enhancing the principle of sustainable development and giving effect to the duty to rehabilitate environmental degradation. But are they affordable in the current climate?

New requirements relating to financial provisions

As is the case in most if not all mining jurisdictions, to operate within the extractives sector in South Africa companies have been required to make financial provision to guarantee the availability of sufficient funds to undertake rehabilitation and remediation for any negative environmental impacts of prospecting and mining of mineral resources, and the exploration and production of petroleum resources. Recent changes to the applicable law impose stricter requirements relating to the calculation of the financial provision that must be provided. As a result, extractive companies will need to secure access to additional funds to discharge these new obligations. In the current economic climate, securing access to these funds may be difficult especially where measures to reduce costs are being prioritised. However, the change is a welcome one, particularly in securing the sustainable utilisation of water resources, which is often inadequately managed post-closure and has proved to be particularly problematic in a water-scarce country like South Africa.

These changes have been brought about by the publication of the regulations on the financial provision for prospecting, exploration, mining or production operations. The regulations govern the method for determining and providing the financial provision required for the rehabilitation, closure and ongoing post-closure management of negative environmental impacts caused by prospecting, mining, exploration and production operations. The regulations were promulgated on 20 November 2015 under the National Environmental Management Act, 1998 (NEMA), which is the framework act regulating environmental governance in South Africa. The regulations repeal and replace the previous regulations published under the Mineral and Petroleum Resources Development Act, 2002 (MPRDA) and introduce a more onerous and detailed governance system in respect of financial provisions.

Scope of financial provision

Under the regulations, an applicant or holder of a right or permit issued in terms of the MPRDA is required to make financial provision for rehabilitation and remediation, decommissioning and closure activities at the end of the operations, and remediation and management of latent or residual environmental impacts which may become known in the future and after the issue of a closure certificate, including the pumping and treatment of polluted or extraneous water.

Method for determining the financial provision

The financial provision is determined by providing relevant information in three separate documents:

The regulations prescribe the minimum content required in each of the documents. The information required in each document is comprehensive and will require that extractive companies undertake more detailed investigations into the effects of their operations on the environment and the actions and measures necessary to rehabilitate these impacts than was previously required. For example the minimum content of an environmental risk assessment report requires details of the assessment process used to identify and quantify the latent risks. The information required includes reasons to be provided why each risk is latent, why it was not or could not be mitigated during concurrent rehabilitation and a description of the expected timeframes in which the risk is likely to manifest. Detailed information relating to the management of the risks and associated costs is also required.

Sufficiency of the financial provision

The financial provision provided for by an applicant or holder of a right or permit must, at any given time, be able to satisfy the actual cost of implementing all the measures specified in the annual rehabilitation plan, closure plan, and environmental risk assessment report for a period of no less than ten years. As such, the financial provision must provide not only for ongoing rehabilitation and final closure, but also for the management of post-closure environmental impacts and for latent or residual impacts that may only become known in the future. The holder of a right or permit, through its chief executive officer or person appointed to a similar position, is responsible for implementing the approved plans and is required to ensure that the plans and financial provision is in place before submitting an application for a closure certificate in terms of the MPRDA.

Financial instrument approved for making of a financial provision

Financial provision must be made by providing a financial guarantee from a registered bank or financial institution, depositing money into an account administered by the minister responsible for mineral resources, or by contributing to a trust fund. The wording of both the guarantee and the trust fund are prescribed in the regulations. The portion of the financial provision required for the remediation of latent and residual impacts must be made available to the minister upon the issue of a closure certificate either through a cession of the financial guarantee or the authorisation of such payment by the trustees of a fund. Despite the issue of a closure certificate and the transfer of the remaining portion of the financial provision, the holder of a right or permit will, in terms of NEMA and the National Water Act, 1998, remain liable for any environmental degradation or pollution caused by it.

Temporary relief for existing operations

A welcome although temporary dispensation has been granted to holders of existing financial provisions approved under the MPRDA. The regulations specify that these must be regarded as having been approved under the regulations. Therefore, there is no immediate obligation to increase current financial provisions. However, a holder that operates in terms of the financial provision approved in terms of the MPRDA is required to review and align that financial provision to the requirements set out in the regulations within three months of the end of the company’s financial year-end, or by 20 February 2017 at the latest, and annually thereafter. Financial provisions approved for the first time in terms of the regulations will also need to be reviewed annually. Where an alignment review shows that the financial provision must be increased but the company is unable to do so, the minister may after considering the financial stability and operating methodology of that company conclude a payment agreement to facilitate the company bringing its financial provision in line with the reviewed amount. The terms of a payment agreement will be governed by the regulations but the period may not exceed five years to bring the financial provision in line with the assessed and audited financial provision. We envision that the payment agreement will be a well-utilised mechanism to avoid the immediate impacts of the regulations, especially where current economic realities make securing additional financial provision difficult.

Care and maintenance

An interesting aspect of the regulations is that it also formalises the process of placing operations into a state of temporary closure known as care and maintenance.  The regulations allow for care and maintenance to be implemented for a period of up to five years, in accordance with an approved care and maintenance plan, the content of which is prescribed by the regulations.  During a period of care and maintenance, adequate financial provision must be maintained.

Consequences of non-compliance

Failure to comply with the regulations is an offence with associated criminal sanctions of a fine of up to R10 million and a period of imprisonment of up to ten years. It should also be noted that NEMA specifically provides for directors to be held personally liable for any negative impact on the environment, whether advertently or inadvertently caused by the company which they represent, including damage, degradation or pollution. Therefore, it is crucial for the board of an extractives company to develop effective mechanisms for ensuring implementation of and compliance with these regulations.

A more sustainable extractives sector

Although the changes brought about by the regulations are significant, they were long anticipated because of historic practice that frequently saw vastly inadequate environmental rehabilitation because of inadequate financial provisions being made.The regulations, if implemented effectively, are an important legislative measure to ensure sustainable development within the extractives sector.