South Africa: New Financial Provision Regulations Under NEMA

Last Updated: 12 February 2016
Article by Rob Scott and Kate Swart

Exacting requirements for the mining industry and an alert for environmental guarantee insurers: the new financial provision regulations under the National Environmental Management Act (NEMA)

The Purpose of the Regulations

The purpose of the Regulations is described as follows:

"...to regulate the determine [sic] and making of financial provision as contemplated in the Act for the costs associated with the undertaking of management, rehabilitation and remediation of environmental impacts from prospecting, exploration, mining or production operations through the lifespan of such operations and latent or residual environmental impacts that may become known in the future."

The publication of the Regulations in terms of NEMA is in line with a move towards 'One Environmental System', and the transfer of all environmental governance law out of the domain of the MPRDA.

Prior to any exploration, prospecting or mining taking place, rights applicants or holders must make financial provision for three things:

  1. rehabilitation and remediation (on an on-going basis annually, and upon closure of a mine);
  2. decommissioning and closure activities at the end of an operation; and
  3. remediation of latent or residual environmental impacts which may become known in the future (this third requirement now includes specific provision for the pumping and treatment of polluted or extraneous water).

Financial Provision

Prior to these Regulations, the required quantum for financial provision was determined through reference to Regulations 53 and 54 under the MPRDA, and the  Guideline Document for the Evaluation of the Quantum of Closure-Related Financial Provision Provided by a Mine, prepared by the Department of Minerals and Energy (as it then was) in 2005. Although there had been a broad description of the types of rehabilitation and remediation which had to take place, no detail was provided as to exactly what this should entail, what standards should be achieved, and consequentially there was no established bench-mark for the value of a financial provision.

The Regulations now provide more certainty on how to calculate the 'financial provision' required of all mining and prospecting rights applicants or rights holders.

The new Regulations list three plans which must be included in the Environmental Management Programme: an Annual Rehabilitation Plan; an Environmental Risk Assessment Report; and a Final Rehabilitation, Decommissioning and Mine Closure Plan. The minimum contents for each plan are attached to the Regulations as Appendixes 3, 4 and 5. Each activity listed in the plans must be itemised, and the cost of immediate implementation thereof must be calculated. The financial provision (either in the form of a single vehicle, or a combination of vehicles) must, at any given time, equal the sum of the actual costs of implementing the plans put in place by the rights applicant or holder for a period of at least 10 years going forward.

A new component of the Regulations is the provision which must be made for annual rehabilitation (including a minimum requirement for the annual rehabilitation plan), which must take place on an on-going basis (as opposed to waiting until the closure of a mine).

A further (and new) requirement is that the provision made for latent or residual environmental impact must specifically address the pumping and treatment of extraneous or polluted water. Prior to the transfer of environmental governance provisions into NEMA, a mining rights holder's liability ended upon the issuing of closure certificates. NEMA now specifically provides that liability, including the responsibility for extraneous or polluted water, continues after closure. The inclusion of this provision in the regulations setting out how to calculate the financial provision is a clear indication that the quantum of the provision will necessarily increase.

The adequacy of the financial provision must be reviewed and assessed annually. The result of this assessment must now also be audited by an independent auditor, and submitted to the Minister. Any excess must be deferred against subsequent assessments, and any shortfall must be remedied by increasing the financial provision, within 90 days from the date of signature of the auditor's report.

In addition to the requirements for new financial provision, the Regulations require that existing provision be reviewed and aligned with the new Regulations. Such review must take place within 15 months of the Regulations, or within three (3) months of its financial year end. Should the rights holder be unable to meet the revised financial provision, a payment plan may be entered into with the Minister.

A failure to comply with the Regulations relating to the determination, making available, keeping available, and review and required increase of financial provision will constitute an offence, which carries a fine of up to R10 million, or up to 10 years' imprisonment, or both such fine and imprisonment.

The financial vehicles which may be used for financial provision

The financial vehicles which are to be used for financial provision remain the same: contributions to a trust fund; financial guarantees (either provided by banks or registered insurers); or deposits into an account administered by the Minister responsible for mineral resources (the Minister).

The financial vehicles through which an applicant or holder of a right or permit must make financial provision, either individually or in combination, are described as follows:

  • "financial guarantee from a bank registered in terms of the Banks Act, 1990 (Act No. 94 of 1909) or from a financial institution registered by the Financial Services Board as an insurer or underwriter;
  • deposit into an account administered by the Minister responsible for mineral resources; or
  • contribution to a trust fund established in terms of applicable legislation..."

A proviso to the vehicle of the trust funds, which was previously the most popular choice (being tax deductible), is that a trust fund may now only be used for financial provision relating to remediation of latent or residual environmental impacts which become apparent after a mine's closure. It should also be noted that the envisaged trust fund must be established by a deed of trust in the format set out as an Appendix to the Regulations.

This means that there will now necessarily be more appetite for financial guarantees provided by insurers, since cash flow is a scarce and highly valued commodity in today's mining environment, and bank guarantees and deposits of cash would tie up large sums for the entire life cycle of the mine.

The Financial Guarantee

Financial guarantees must now accord with a standard form, which is Appendix 1 to the Regulations.

The guarantee wording pursuant to which payment is triggered provides

"2.  The Guarantor hereby unconditionally undertakes, as a principal obligation, to pay to you the Guaranteed Sum by no later than 2 working days (Mondays to Fridays, excluding weekends and public holidays) after receipt of a written claim from you (or made on your behalf) to do so, which claim:

2.1 must state that the holder of the right or permit:

2.1.1 has failed to execute the plans used to determine the financial provision in accordance with its terms; and/or
2.1.2 has failed to commence execution of the final rehabilitation, decommissioning and mine closure plan or the environmental risk assessment report within 10 working days (Mondays to Fridays, excluding weekends and public holidays) of the earlier of (i) the date on which such commencement is required by law or (ii) the date of written notice to the holder requiring such commencement, in circumstances in which prospecting, mining, exploration or production operations, (as the case may be) have ceased; and/or
2.1.3 has commenced execution of the final rehabilitation, decommissioning and mine closure plan or the environmental risk assessment report but has failed to make adequate progress with execution of such final rehabilitation, decommissioning and mine closure plan or environmental risk assessment report at any time prior to its completion in accordance with its terms; and/or
2.1.4 has become subject to an order of court placing him/her/it in or under sequestration, liquidation or bankruptcy (in any case whether voluntary or compulsory, provisional or final) or any analogous order is granted or resolution taken in any jurisdiction in relation to the holder of a right or permit..."

Claims may be made at any stage commencing from the date of signature of the guarantee, until the guarantee expires upon the issuing of a closure certificate in respect of the whole mine. Payment is also automatically triggered without the need of the above written claim, in circumstances where a financial institution gives notice of withdrawal from the guarantee and the holder of a right or permit fails to put in place an alternative arrangement. All that is required in such an instance is a written notice (see below).

The following observations, which raise concern, are made:

  • Payment within two (2) business days:
    • This tight deadline is problematic, as an assessment of the call will have to be made by the financial institution (either a bank or insurer), and payment will have to be made into the Department of Mineral Resources' account, within this time period.
  • Vague threshold for calls
    • One of the bases on which a call may be made is vague. Clause 2.1.3 (see above) provides that a call may be made where rehabilitation or decommissioning is being carried out, but "adequate progress" has not been made.
    • It is unclear whether it is only within the discretion of the Minister to decide whether the progress is adequate, or whether some objective test will be applied.
  • Automatic trigger
    • A financial institution may withdraw from a guarantee, but must give at least 4 months' written notice to the holder, the Minister responsible for mineral resources and the Minister responsible for environmental matters, prior to such withdrawal. The holder of a right or permit must also, within 7 days, communicate this to the relevant Minister. If the holder of a right or permit fails to provide the Minister, within 60 days, with alternative arrangements, the Minister is obligated to call on the financial guarantee, and to deposit the proceeds into a bank account controlled by the Minister.
    • No more than a written notice calling up the guarantee is required (without any allegations of a failure on the part of the right or permit holder), and the financial institution is obliged to make payment of the amount within the same two (2) day period.
    • This provision in effect restricts financial institutions from effectively withdrawing from guarantees where they suspect that the holder of a right or permit may be in financial distress. This is so because, where a beneficiary is indeed experiencing financial difficulties, it will be unable to put in place alternative arrangements, and the no-fault call will necessarily have to be made by the responsible Minister.
  • Guarantees cannot be used for post-closure financial provision
    • Whilst the Regulations do not limit the use of guarantees to any particular aspect of the environmental rehabilitation and decommissioning process, it is clear that this vehicle cannot practically be used in the post-closure stage.
    • The first reason is that the pro forma wording states that the guarantee expires upon the issuing of a closure certificate. Yet financial provision must be made for the remediation of latent or residual environmental impacts which may become known after closure.
    • The second reason is that provision must specifically be made for the pumping and treatment of polluted or extraneous water in order to avoid Acid Mine Drainage. Such pumping is required indefinitely, and any guarantee provided for this purpose would have to be open-ended (with the quantum being re-assessed annually).
    • A trust fund is therefore the appropriate vehicle for the post closure phase. It is hoped that this oversight will be amended in due course.

Comment

The required financial provision will necessarily increase in light of: the requirement of a very detailed itemisation of the cost of carrying out all planned rehabilitation and remediation; the annual rehabilitation requirements; that sufficient funds must be in place to cover the implementation of plans for 10 years; and the express requirement for post-closure provision for the treatment and pumping of polluted or extraneous water. This will also be so for existing provision because such provision must also be reviewed and re-assessed in order to ensure that it complies with the Regulations. Financial provision will also have to be re-assessed annually, and may therefore increase annually.

The prescribed guarantee is an on-demand guarantee and the established principles in relation to on-demand guarantees will apply. This means that a guarantor undertakes to pay provided only that conditions specified in the guarantee are met. The only basis upon which the guarantor can escape liability is proof of fraud on the part of the beneficiary.

A call on a guarantee triggers an obligation on the Minister to step into the shoes of the right or permit holder and to execute the final rehabilitation, decommissioning and mine closure plan or environmental risk assessment report. The Minister must also, within one year from the date of the payment by the Guarantor, give account to the Guarantor, in reasonable detail, of how the money was utilised. Any portion which remains unutilised must be refunded to the Guarantor, with compound interest at the prime overdraft rate.

On-demand bonds typically provide that payment will not be made unless the original guarantee is presented upon the making of a demand. Two considerations apply here:

  • The prescribed wording of the guarantee provides that the original guarantee need only be returned to the guarantor when giving account to the Guarantor of how the guaranteed sum was used.
  • The question as to what the position is in relation to on-demand bonds in circumstances where the original guarantee is lost is not settled in our law. The prescribed guarantee wording specifically addresses this issue as it provides that, where the original guarantee is lost, a statement that the guarantee is lost and that the beneficiary indemnifies the guarantor against any direct loss which it may suffer as a direct result of the original document not being returned to it, must accompany the account. That statement alone will then suffice.

This article does not purport to address the Regulations in all their respects. The Regulations are detailed and address important aspects not considered here, for example the responsibilities of a holder of a right or permit, the various powers of the Minister, timeframes relative to consideration of financial provision, plans and reports, care and maintenance and transitional arrangements. Care must be taken to comply with the Regulations as the penalty for non-compliance is substantial.

New Financial Provision Regulations Under NEMA

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Kate Swart
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions