Financial provisioning in Queensland: ‘Sneak peek’ into expected reforms

After a three-year transition period and a comprehensive post transition review, the Acting Scheme Manager of Queensland’s financial provisioning scheme (Scheme) has published his recommendations for reform. The report – which is dated 17 February 2023 but was not publicly released until last week – gives resources companies a ‘sneak peek’ into how their financial provisioning obligations are expected to change before draft legislative amendments are released later this year.

Background

In Queensland, the Mineral and Energy Resources (Financial Provisioning) Act 2018 (Qld) (MERFP Act) requires the holders of environmental authorities for resource activities (resource EA holders) to provide financial provisioning to the Scheme Manager to address the State’s financial risk where holders fail to comply with environmental and rehabilitation obligations. The Scheme commenced on 1 April 2019 and included a three-year transition period for existing resource EA holders.

Following the conclusion of the Scheme’s transition period in April 2022, a post transition review was conducted to identify opportunities for refining and improving the Scheme. The review included industry consultation between June and November 2022, with the Acting Scheme Manager’s summary report of recommended reforms now publicly available.

How does the Scheme work?

Broadly, the Scheme involves:

1. resource EA holders obtaining estimated rehabilitation cost (ERC) decisions from the Department of Environment and Science under the Environmental Protection Act 1994 (Qld);
2. the Scheme Manager requiring sureties in the amount of the ERC where the ERC is below the ‘prescribed amount’;
3. the Scheme Manager assessing and assigning resource EAs risk category allocations where the ERC is above the ‘prescribed amount’ – risk categories are based on factors such as the holder’s financial soundness and the characteristics of the relevant resources project, and they determine whether smaller annual contributions and/or larger upfront sureties need to be paid; and
4. the Scheme Manager requiring sureties where a holder’s aggregate ERC exposure exceeds the ‘fund threshold’.

What are the recommended reforms?

A number of proposed reforms to the Scheme were put to industry in two discussion papers released in 2022. Following consultation on the discussion papers, the Acting Scheme Manager has recommended that the following key reforms proceed:

1. adding a new risk category;
2. increasing the ‘prescribed ERC amount’;
3. increasing the ‘fund threshold’; and
4. streamlining processes under the Scheme.

New risk category

Currently, the Scheme involves the following risk categories and corresponding financial provisioning requirements:

Since the commencement of the Scheme, it has become apparent that there are inter-category risk profiles, with some EAs in the ‘moderate’ category posing differing levels of risk. There is also currently a significant jump between a 2.75% contribution for ‘moderate risk’ EAs and a full surety for ‘high risk’ EAs.

The Acting Scheme Manager has recommended that a fifth category of ‘moderate/high’ be introduced. This new category would require an annual contribution of 6.5% of the ERC, with the contribution rate for the ‘moderate’ category to be reduced to 2.25%.

Currently, assigned risk categories can only be reviewed by the Scheme Manager annually, or where certain events occur which change the holder of the EA. It is unclear whether the reforms will include a separate mechanism for ‘high risk’ holders to apply to be downgraded to the ‘moderate/high’ category.

Increasing the prescribed ERC amount

Currently, the prescribed ERC amount is $100,000. Since the Scheme commenced, this has resulted in a significant number of resource EAs requiring risk category assessments and allocations under the Scheme.

The Acting Scheme Manager has recommended this threshold be increased to $10 million. This means all resource EAs with an ERC of between $100,000 and $10 million will no longer need to undergo risk category allocations, however a surety must be provided for the full ERC amount. A two-year transitional arrangement is proposed to help holders provide the larger sureties of up to $10 million where they may otherwise currently be providing significantly smaller annual contributions.

Increasing the fund threshold

The Scheme currently has a fund threshold of $450 million. Where the aggregate ERC for all EAs held by one holder exceeds this threshold but the relevant risk categories only require contributions, the holder must additionally provide a surety to cover the amount over and above the threshold. If a holder exceeds the fund threshold but carries a ‘high risk’ allocation, a surety must be provided for the full ERC amount.

At the Scheme’s commencement, $450 million represented approximately 5% of the State’s total ERC exposure and was therefore set as the threshold. The State’s total ERC has since increased, such that $600 million now represents 5% of the State’s exposure. Accordingly, the Acting Scheme Manager has recommended the fund threshold increase to $600 million, but only for BBB+ or better credit rated entities (other entities will continue to be subject to the existing threshold).

Under the MERFP Act, the fund threshold will be reviewed every three years.

Streamlining processes

Finally, the Acting Scheme Manager has also recommended that Scheme processes be streamlined, including by:

• aligning annual risk category review dates, such that a holder of multiple EAs will now be able to have the risk categories for all EAs reviewed at the same time;
• streamlining assessment fees and pathways, such that the current fees will only be charged for the initial risk allocation and third-yearly reviews, with some assessment fees in other years to be reduced (unless the holder requests a comprehensive - not streamlined – assessment, which will attract higher fees);
• for the purpose of assessing the financial soundness of holders to determine risk categories, implementing a comprehensive financial soundness assessment (FSA) pathway where the standard FSA which currently applies may not be robust enough for particular entities; and
• for the purpose of assessing resource project characteristics to determine risk categories, placing more emphasis on rehabilitation (such that the assessment will now be based on saleability (70%) and rehabilitation (30%)).

Next steps

Any reforms to the Scheme will require legislative amendment. A Bill is targeted to be introduced into Parliament by October 2023 to amend the MERFP Act, with the legislative changes – and an accompanying guideline – expected to take effect in April 2024.

While only the Bill can confirm the exact changes to be proposed to the Scheme, the Acting Scheme Manager’s recommendations give a taste of what is expected and allow resources companies time to prepare. In particular, resources companies should:

1. consider their ERC exposure and current risk ratings to identify how these changes may alter their financial provisioning obligations (including any scope to move into the new risk category where appropriate); and
2. monitor upcoming announcements about the reforms, including any draft guidelines or legislation which may be released.